Frequently Asked Questions
What is an Appraisal?
An appraisal is an estimate of a property’s market value complete by a licensed or certified appraiser. The value is based upon a market analysis of recent sales of similar properties in the area, along with the property’s physical condition.
Why is an appraisal required?
Lenders us the appraisal to determine the appropriate loan amount. Because home values can vary considerably, even in the same neighborhood, it’s important for the lender to have an objective opinion of value for the home before making a loan. A lender will not lend more than the value of a home and the appraised value is used to determine the amount of the loan.
How does an appraiser reach an “opinion of market value?”
An opinion of market value is an estimate of how much a property is worth in any given market. An opinion of value is reached by using one of three standard approaches:
- The Cost Approach estimates what it would cost to replace or reproduce the improvements as of the date of the appraisal. An appraiser will subtract out any deterioration and then add in the land value to determine an opinion of market value.
- The Comparison Approach is the most common approach to value used in an appraisal. This approach looks a properties of similar size, quality, and location that have recently sold in order to derive a comparative value. An appraiser will adjust for variations between properties to reach an opinion of market value.
- The Income Approach is generally used for commercial properties, and for income producing residential homes such as duplexes. The income approach estimated the value of the property based on the net income the property produces.
Can “market value” be different than the cost of a property?
It is possible for market value to differ from the actual cost of a property. This depends on a number of factors such as physical deterioration, exterior influences, geography, national and local economic changes, or other things. A licensed or certified appraiser takes into account all these influences when arriving at an opinion of market value.
For example: A home cost $200,000 to build in a small community. A new big employer moves into town bringing in hundreds of jobs. Demand for homes increases and the property value rises to $220,000.
OR
For example: A home cost $200,000 to build in a small community. All homes in the area have neutral color paint and granite counter tops. An artist buys a home and repaints some walls purple, and spends $10,000 to replace the counters with custom shaped concrete counters. The market value of the home decreases to $180,000. This is because the average buyer would need to “remedy” the home by painting and replacing the counters to bring it back to the market norm. Therefore an average buyer would discount the home by the cost to remedy the home.
Remember just because you spend money on a home doesn’t mean you’ll get the dollar-for-dollar price out of it.
Can a seller hire their own appraiser?
A seller can hire their own appraiser to value their home before placing it on the market. However a lender will not accept this appraiser for purposes of loan approval or financing. Another appraisal will need to be done by an appraiser the lender selects.
Who picks an appraiser?
When a lender needs an appraisal, the lender hires a third-party called an AMC (Appraiser Management Company) to contract with an appraiser. The AMC will contract with a qualified appraiser to evaluate the property.
In this way the lender and appraiser do not interact and the appraiser is able to give an objective opinion of value without pressure from the lender.
How can you prepare your home for an appraisal?
Contrary to popular belief, an appraiser does not take into account the “messiness” of a home when reaching an opinion of market value. An appraiser is looking at the the home itself and any maintenance that needs to be done to the property.
Be sure to tell an appraiser about any upgrades or improvements made to the home, as well as any problems that need to be addressed.
Does the appraiser perform a home inspection?
An appraiser is not a home inspector, engineer, plumber, or electrician so you should not expect them to provide estimates for repairs or other information related to the condition of the home.
You may want to tour the property with the appraiser to answer any questions that may come up during the inspection. A majority of the time most aspects of the home are readily visible and the appraiser will finish an walk-through by asking follow-up questions.
What is the appraisal process?
The appraisal process generally begins before the appraiser ever sees the property. The appraiser gathers external information from national, state and local governments including flood maps, plat maps, zoning information, property boundaries, local economic data, and more.
The appraiser then does a physical walk-through of the property, taking pictures and making notes that will help them decide the quality and condition of the home. After the inspection the appraiser begins the report.
The appraiser compiles data about recent property sales, external information, and the subject property and begins to find the market value using one or more of the approaches to value. After making adjustments and deciding on the relevant data to be used, the appraiser will reach an opinion of market value.
What if the value isn’t what I expected?
In a rapidly changing market, buyers and sellers are often surprised when the appraised value is higher or lower than expected. A higher value will not have an impact on the loan approval process, but a lower value can. The lower appraised value is used to determine an acceptable loan amount, which is generally up to 80% of the appraiser’s opinion of the home’s value.
Remember, as discussed above, you typically won’t get a dollar-for-dollar return on the money you spend within your home.
An appraiser can only work with the information that is available to them. (They aren’t mind-readers) Sometimes a lender will send over incomplete information, or dated plans that don’t include information about the property. If you believe that the appraisal is missing relevant data that could affect the opinion of value, you can work with your lender and the appraiser to address these concerns. Sometimes it may change the opinion of value, other times the opinion of value will remain the same even with additional information.
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