If you are a homeowner you probably had an appraisal performed on your home at one time or another. It could have been when you were purchasing the home or refinancing the home. The purpose of the appraisal in these instances was to determine the “Fair Market Value” of your home in order to secure the loan. I hope the following will help you understand the appraisal process better.
The lender contacts a local certified appraiser who will make an appoint to come and inspect your property. During this inspection he will measure the outside of the dwelling and any other improvements on the site such as a detached workshop or garage. He will also note any repairs that would affect the structural soundness of the dwelling such as a worn roof. Keep in mind he is not an expert in areas of mechanical or engineering matters, but will, from a layperson’s observation, indicate what he believes might be a probable problem. Many lenders are suggesting that borrowers secure a licensed home inspector for a thorough inspection of the home. The appraiser will also photograph the structures along with a street scene. He may ask you questions concerning the property. After his inspection he will return to the office to develop the appraisal report.
There are three recognized approaches to value in performing an appraisal. They are Cost Approach, the Income Approach, and the Sales Comparison Approach more commonly known as the Market Approach. The Market Approach is the recognized approach for appraising single family residences.
Before the appraiser can develop the Market Approach in his report, he will gather more information concerning the property such as the legal description and site size, and taxes. He will also provide information to the reader of the report concerning the neighborhood and marketing conditions. Then livable area (square footage) of the dwelling will be calculated from the exterior dimensions of the dwelling. Living area is area that is heated and cooled. Therefore an attached garage would be subtracted from the exterior dimensions to determine square footage. The appraiser then takes all the data concerning the dwelling, site and other improvements and puts it in a grid. He now is ready to get to the heart of the Market Approach.
Most appraisers subscribe to their local MLS service usually provided by the Board of Realtors. This service will show all sold properties as well as currently listed properties. The appraiser will now look for properties in the same marketing area as your property. He will be looking for properties as similar in square footage, age, etc that he can find. These properties need to have sold within the last six months if possible but no more than one year ago. After finding three sales that he considers to be comparable to your property, he will insert the same information on these properties in the grid with your property along with their sales price, sold date, and financing. The next step of the Market Approach is to make adjustments to the comparables for their differences to your property.
Plus and minus adjustments are made on each comparable for differences to your property such as size, car storage, lot size, financing concession, swimming pool, etc. These plus and minus adjustments are then added to determine a net gross adjustment with is applied to the Sales Price of the comparable. For example a comparable might have a swimming pool and sold for $110,000. The swimming pool is the only difference between that comparable and your property and the appraiser determines that this market realizes that a swimming pool contributes $10,000. Therefore; the appraiser subtracts $10,000 from the $110,000 sales price of the comparable which indicates the market value for your home is $100,000. He will do that procedure to all three comparables. The adjusted comparables will then indicate a value range for your property. An example might be $100,000 – $112,000.
Based on the appraiser’s inspection of the property he will decide where he feels your property value lies within the indicated value range. Condition and market appeal will play into reconciling the final “Fair Market Value”. Before turning his report into the lender, he will inspect the comparables from the street and also take photographs of them. The report along with a floor sketch and photographs will be sent to the lender.
The appraiser is often asked during his or her inspection, “What is the value of my property?” While he or she might have a ball park figure in mind there is a procedure that they follow that includes more than the field inspection. I hope the next time you have your property appraised you will better understand the appraisal process.