When you’re buying a home using a mortgage, refinancing your existing mortgage or selling your home to anyone other than an all-cash buyer, the home appraisal is a key component of the transaction. Whether you’re a buyer, owner or seller, you’ll want to understand how the appraisal process works and how an appraiser determines a home’s value.
An appraisal is an unbiased professional opinion of a home’s value. Appraisals are almost always used in purchase and sale transactions and commonly used in refinance transactions. In a purchase and sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinance, it assures the lender that it isn’t handing the borrower more money than the home is worth.
This opinion or estimate is derived by using three common approaches, all derived from the market.
- The cost approach to determining value will value the land less any depreciated improvements. The improvements refer to new construction costs of the improvements on the land in today’s standards. Most real estate appraisals using this method will start with a replacement cost and then subtract value for any issues relating to the land or the improvements on the land.
- The comparison approach to determining value makes use of other benchmark properties of similar size quality and location that have been recently sold. The home’s amenities, the number of bedrooms and bathrooms, floor plan functionality and square footage are also key factors in assessing the home’s value. The price variations are generally averaged to create a fair market value for the property being appraised.
- The income approach to determining value is mostly used for commercial properties, not residential. This type of appraisal uses models to predict the behavior of market participants, in particular with regard to commercial, income-producing properties.
Then after thorough analysis of all general and specific data gathered from the market a final estimate or opinion of value is correlated.
Appraisal? Home Inspection? And the difference is?
Big, very big! For an appraisal, we look at things that may present health or safety issues such as a cracked foundation, exposed wires or broken plumbing. Our reports include only “readily observable items and surface observations.”
While we make sure there is running water and a functioning heating system, we don’t test those mechanical systems, and we don’t make recommendations beyond repairs needed to address any observable health/safety deficiencies.
Home inspectors and appraisers have very different licensing requirements, in states that even require a license for home inspectors!