Home appraisal estimate
An appraisal is an opinion of value by highly trained professionals, known as appraisers. Home appraisals are used to estimate market value for mortgage loans, estate valuations, property tax assessments, etc. Appraisers estimate value by employing different valuation methods. The appraiser will also evaluate the overall condition of the property being appraised. Home appraisers are not home inspectors; however, residential appraisers are trained to recognize potential problems such as faulty electrical wiring, defective plumbing and suspicious leaks in the foundation or roof (among other things). If the appraiser has any concerns about the condition of the house, the appraiser will request an examination by a professional.
Appraisers will attempt to locate three or four homes that
have sold recently in the same neighborhood (or within a
reasonable distance from the home), with similar square
footage, age, condition, style, and other characteristics.
Appraisers hardly ever find an exact match, so the appraiser
will add or subtract value from the comparable houses to
compensate for the house's deficiencies or improvements
compared to the house they are appraising. The appraiser
will also evaluate the neighborhood and its impact on value
on the subject home.
How property values are calculated
Sales comparison - this appraisal approach consists of evaluating the home's value by comparing the "subject home" to other similar homes within a reasonable distance from the subject property. For example, let's say the mortgage lender requests an appraisal of a townhouse in a condominium development. The appraiser will estimate the value of the townhome by comparing the subject townhouse to similar townhouses within the condominium development. The appraiser will adjust value up or down based on the condition of the subject home to the townhouses that recently sold.
The market data (sales) comparison is one of the three accepted techniques for estimating market value. This appraisal method is based on recent sales of similar properties in the local market. The market approach assumes the average buyer will purchase the property as an alternative to buying similar a property. The market value method is most reliable means to estimate value when market activity is normal and there are many similar homes for comparison. When the real estate market is slow, it can be challenging to find enough comparison sales to gain a reliable indication of value.
The sales prices of recently sold (i.e. 6 months) comparables are adjusted to account for any differences between the comparable property and the subject property. Adjustments are commonly made for such features as size, quality, and date of sale, location, condition, physical attributes, and financing. If special financing was used in the sale, a portion of the sales price may be adjusted to the benefits of the loan to the buyer.
Each adjustment is based on the appraiser's opinion of how much the marketplace is paying for a feature. Adjustments are employed to establish the price of the comparable at what it would have been if the home had similar features as the subject property. After all comparables are adjusted, the appraiser arrives at the value from among the adjusted sales prices. The market approach is the best approach to estimate market value.
Income Approach - The income capitalization
approach is one of the three standard methods used to derive
value indications. The method is based on the value of the
income produced by the property and assumes the typical
buyer views the property as an investment. The emphasis is
on the financial returns from the property rather than on
physical characteristics. The income approach is most
reliable when the property produces current income and is
similar to other income-producing properties in the market.
The method is not useful to appraise properties held mainly for appreciation or development potential, such as raw land. It is also not used for owner-occupied housing.
Cost Approach - The cost approach is the third method of deriving an estimate of value. This appraisal method is based on the cost to reproduce the subject property. The cost approach is often used to support another appraisal approach and is a favorite of the insurance industry. This method can be the most suitable method of determining value when the property is new, unique, or when market conditions are abnormal. The cost method generally starts with an estimate of the cost to reproduce an exact replica of the subject property at current building costs. The value of the land is added to the reconstruction cost to establish value.