With all the changes in the industry the past few years, it’s important to understand what a home appraisal is and what it isn’t. A home appraisal is a survey of a home by a professional for their opinion of the property market value. It is usually ordered by a bank when a home is being approved for a loan for a home buyer. It is the best assurance for the lender that they won’t lose money on the transaction by loaning more money to the home buyer than the home is actually worth.
An appraiser will create a detailed report that loooks at various items including the condition of the home, the neighborhood, what similar homes are selling for, and how quickly similar homes have sold. If you are in an area where market conditions have negatively changed from foreclosures and short sales, the appraised value of your home could be affected. For example, if there are 10 houses on your street and 4 of them are in foreclosure, you’re home value will be lower than you expect. The two most common appraisals are the Sales Comparison Approach and the Cost Approach.
n the sales comparison approach, the appraiser compares the property with three or four similar homes that have sold in the area, often called comparables.The analysis considers specific components, such as lot size, square footage of finished and unfinished space, style and age of house, as well as other features such as garages and fireplaces.
The cost approach is used more for new property and is based on reproduction costs. The appraiser estimates the cost to replace the structure on the property if it were destroyed. The appraiser then looks at land value and depreciation to determine the property’s worth.