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.
An appraisal is an unbiased professional opinion of a home’s value. Purchase and sale transactions often use appraisals, as well as refinance transaction. In a purchase and sale transaction, an appraisal determines whether the home’s contract price is appropriate. This is based on 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. Then, they’ll 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. For instance, similar size quality and location of homes that were 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 appraiser will generally average the price variations to create a fair market value for the property.
- Commercial properties often use the income approach to determine the value. This type of appraisal uses models to predict the behavior of market participants. This type in particular with regard to commercial, income-producing properties.
The appraiser will do a thorough analysis of all general and specific data gathered from the market. Then they will then correlate a final estimate or or give an opinion of value.
Appraisal? Home Inspection? And the difference is?
Big, very big! For an appraisal, we look at things that may present health or safety issues. 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. 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!