What are Home Appraisal Methods?
Appraisers use three common approaches when establishing the value of a given property:
1) Sales Comparison Approach: In this approach the appraiser identifies 3-4 comparable properties in the neighborhood which have recently been sold. Ideally, the properties are close in vicinity (within a ½-mile radius of the subject property) and have sold within the last 180 days. These homes will be of a similar nature in size, rooms, and layout. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and the condition of the property. This is the most common approach used in appraising residential or home properties.
2) Cost Approach: In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building. This is typically used with income or commercial properties.
3) Income Approach: In this approach the potential net income of the property is capitalized to arrive at a property value. This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream into a present value is known as capitalization. This is typically used with income or commercial properties.
After thorough exercise of the three approaches, a final estimate or opinion of value is arrived upon based on the underlying data. When evaluating single-family, owner-occupied properties, the sales comparison home appraisal approach is most heavily used by an appraiser.
Comparables - Evaluation of Similar Home Sales
The next step is for the appraiser to look at comparables, also often referred to as “comps.” Comparables are similar homes that have recently sold in the general area or even that specific neighborhood or subdivision. Appraisers look for houses that share similar characteristics with the subject property, such as size, age and architectural style. Comps typically only include homes listed and sold within the past three to six months.
The Final Report of Value:
The last step in the home appraisal process is preparing a final report of value. This report will provide you and your lender with a complete property analysis. It will also outline how the appraiser calculated your home's worth. Typically, the final report of value will cover the following items:
- Size and condition of the house
- Comments about serious structural problems, like cracked foundations, wet basements, windows that need replacement and roofing that needs repair
- Permanent fixtures, such as lights, ceiling fans and plumbing, including faucets
- Details about any home renovations such as updated kitchens, bathrooms or new flooring
- Comments about the surrounding area, including positive and negative local features
- Maps, photographs and sketches of the property, both inside and out
- A detailed current market analysis, including recent sales of comparable homes.