Definition of a Home Appraisal

A home appraisal serves many stakeholders in a real estate transaction.

A home appraisal is the estimate (opinion) of value of a specific property, as of a specific date, as supported by researched facts and data. A competent appraiser is hired to use accepted appraisal methods to formulate the estimate, which is then provided in a written report. It is a tool used by numerous stakeholders involved in real estate transactions, including buyers, lenders, sellers and insurance companies.

Significance

A lender will require a home appraisal in order to establish the approved loan amount.

Lenders require a home appraisal before approving a mortgage to ensure that the property will sell for at least the amount of money it is lending should the borrower default on the loan. Thus, a "low" appraisal, as compared to the contract (sales) price, may derail a transaction if the buyer is unable to contribute a large enough down payment to make up the difference between the approved loan and the sales price. A low appraisal may also compel the seller to lower the sales price in order to save the transaction.

Types of Approaches to Value

According to National Association of Independent Fee Appraisers, there are three common approaches to value. The Cost Approach to value takes the value of the land, as if vacant, and adds the cost to replace or reproduce the improvements as of the date of the appraisal (taking into consideration the physical deterioration and the functional and economic obsolescence).

The Comparison Approach to value, typically used for residential properties, considers a number of similar properties that have recently sold in the same neighborhood. A comparison is then made, using necessary adjustments where needed for differences, to determine the value of the subject property.

The Income Approach to value, rarely used for residential appraisals, is primarily used for income-producing properties. This approach provides an estimate based upon the net income the property produces.

Appraisal Process

Appraisers must meet minimum standards or licensing as established by each state.

In order to determine the estimate of value based on the Comparison Approach, an appraiser will research the subject property as to the size, number of bathrooms, year built, lot size, square footage and other key metrics. He will also gather information from recent sales of similar properties in the neighborhood, as well as the neighborhood itself--including nearby churches, schools, transportation and shopping. Some of the data will be collected during an inspection of the property, while other data will be secured through research. Based on this information, the appraiser will prepare the Appraisal Report, which will include the conclusion of value and supporting data.

Considerations

According to the Appraisal Institute, in order to provide appraisals to federally regulated lenders, an appraiser must be state licensed or certified. Select states also have similar license and certification requirements for other parties. Appraisal licensing and certification require that a state-administered examination be passed.

Misconceptions

A home appraisal is not a home inspection. The appraiser is retained to produce an opinion of a property's value, while a home inspector performs a visual examination of the physical structure from the roof to the foundation, as well as the heating, air conditioning, plumbing and electrical systems. The primary purpose of a home inspection is to report on the condition of the home, not the value.

References

• National Association of Independent Fee Appraisers: Process

Resources

• Appraisal Institute