What You Need to Know About Home Appraisals

By on October 15, 2018

A home appraisal is how the the fair market value of your home is assessed. Appraising the value of real estate is an essential component of purchasing or refinancing a home. Essentially, a state-licensed appraiser will assess everything from local schools to leaky faucets to estimate your home’s current market value.

The appraisal is critical in determining how much of a mortgage the lender will approve for a home you wish to buy. So if you are looking to buy, sell or refinance a home, learn more about the methods and costs of real estate appraisal before taking steps to ensure your home is rated at the best value possible.

Methods Used in Home Appraisal

An appraiser will use one or several different methods for evaluating the different aspects of your home, depending on the location and style of your home. Here are the three most common methods:

The Cost Method

This is the least used method of appraisal which requires an in-depth knowledge of construction and building materials. An assessment is made of the market cost of the land which you own. Then, the value of the home would be calculated combining the value of the land with the cost to rebuild your home (less depreciation). Typically, this appraisal method is used for new homes when the cost to rebuild the structure is known or when no homes have been sold to enable the following approach to be used.

The Market or Sales Comparison

This is the most common method of appraisal which calculates the value of the home in comparison to similar homes – sold within the previous 180 days – in the same neighborhood. Comparable properties will have similar square footage, number of bedrooms, baths, and amenities within a half-mile radius.

The appraiser will assess the market value of three comparable properties to the home in question, and deduct for comparative deficiencies or increase the value based on comparative advantages – ie. more square footage, better maintained property, etc.. This method is most commonly used for conventional home financing or refinancing.

The Income Capitalization Comparison

For investors with income properties, appraisers may often use the income approach to determine value based on an objective estimate of what an investor would pay based upon the net income the property produces. The anticipated cash flow is presented in relation to its net operating income. This way, when an investor goes to sell the property, they can calculate the sales value by dividing to the income generated from the property by the capitalization rate (the rate of return on a real estate investment). .

The Cost of a Home Appraisal

The cost of a home appraisal depends largely on the size of a home and the extent of the appraisal. Appraisals that do not require the appraiser to go inside the home are less costly, but they are also less common. And many appraisers charge more for larger, more valuable homes, condominiums and lots.

The costs for a home appraisal will be paid by the borrower looking to buy or refinance a home mortgage. In spite of who pays, the appraisal is owned by the lender or mortgage company.

If you are buying or refinancing a property, most lenders and mortgage guarantors – like the FHA and VA – will require a professional home appraisal. But remember, an appraisal is NOT the same as a home inspection. An appraiser may look at the condition of your home and note major problems, but this does not take the place of a home inspection. Be sure to have a professional home inspector make a comprehensive home inspection before purchasing your home.

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