Home Appraisal Basics

An appraisal is a necessary step in the home purchase or home refinance process. Most lenders will not lend on a property without an appraisal. Below are a few more reasons why an appraisal might be needed:

• To determine a value when selling a home.
• To contest high property taxes.
• To finalize and settle a divorce.
• To settle an estate.
• To use as a negotiation tool when selling.
• To establish the replacement cost (insurance purposes).
• To protect your rights in an eminent domain case.
• To refinance.

Appraisers use three common approaches when establishing the value of a given property:

1. Sales Comparison Approach: In this approach the appraiser identifies 3-4 comparable properties in the neighborhood that have recently been sold. Ideally, the properties are close in vicinity (within a 1/2 mile radius of the subject property) and have sold within the last 180 days. These home will be of a similar nature in size, rooms, and layout. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and the condition of the property. This is the most common method used in appraising residential or home properties.
2. Cost Approach: In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building. This is typically used with income or commercial properties.
3. Income Approach: In this approach the potential net income of the property is capitalized to arrive at a property value. This method is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream into a present value is known as capitalization. This is typically used with income or commercial properties.

After thorough exercise of the three approaches, a final estimate or opinion of value is arrived based on the underlying data. When evaluating single-family, owner-occupied properties, the sales comparison home appraisal approach is most heavily used by appraiser.

Even though the borrower pays for the home appraisal, the mortgage company is the owner. This is counter-intuitive and can be frustrating for borrowers that are dealing with a mortgage company they have decided not to work with. This is because the mortgage company orders the home appraisal on the borrower’s behalf, and the appraiser than names that mortgage company on the home appraisal. The borrower does have a right to receive a copy of the real estate appraisal, however. It is at the mortgage company’s discretion whether or not to give the borrower the original home appraisal.