Appraisal Basics

‍What is a home appraisal?‍

It’s a professional appraiser’s opinion of the market value of real property. The process begins with the appraiser taking notes and pictures of every room while walking through the home, or subject property, as it is known in the appraisal world. Then, the appraiser researches appropriate market areas along with the gathering and analyzing of information regarding the subject property, the subject neighborhood and the comparable sales. The time is takes to complete an appraisal varies greatly depending on the difficulty of the assignment.

Why is an appraisal needed when purchasing a home?‍

An appraisal is needed when trying to purchase a home for a few reasons. First, the appraisal process can protect home buyers from potentially overpaying for a property. Second, the appraisal lets the lender know whether or not the home is worth the purchase price. It will affect how much money the lender is willing to lend the client. Finally, an appraisal is almost always required if the loan is being backed by a government sponsored entity, such as Fannie Mae, the FHA or the VA.

What are the main things that affect an appraisal?

There are three main things that affect an appraisal, they include:

The style and size of the home — Appraisers must compare apples to apples where possible. If the subject is a one-story, 1,500 sq. ft. ranch, the appraiser will be using similar sized, one-story, ranch-style homes as comparable sales.

The condition of the home — Homes with high quality upgrades typically appraise near the higher end of the value range. Conversely, homes with minimal updates are going to appraise at the lower end of the range.

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Availability — The availability of comparable sales in the subject’s neighborhood will also affect an appraisal. Pay attention to sales prices of recently closed sales in the subject’s neighborhood. These are the sales that an appraiser must consider and are a likely indicator of value of the subject property.

How does an appraiser determine value?

An appraiser determines the value of real property by assembling a report based upon the information gathered from the walk through, the research in the market area and the information on the comparable sales and listings. Lenders will require the appraised value be based upon the sales comparison approach. They accomplish this by making adjustments to the prices of the comparable sales, which are based upon differences between the comparable sales and the subject property. The adjustments are based on the market’s reaction to the items, not by the cost of an item. The appraiser then reconciles the opinion of market value based upon the adjusted prices of the comparable sales.