What is an Appraisal

An appraisal is an estimate of the properties fair market value and an appraisal is usually required by a lender before loan approval. Lenders want to ensure that the mortgage loan does not exceed the value of the property. Most appraisals are performed by a qualified and licensed appraiser that evaluate a property based on its location, amenities, and condition.

Why get an Appraisal

Depending on the type of loan program, and appraisal must be obtained when loan approval is necessary. Lenders won’t loan money on a property that is valued less than the loan amount. Even though this is the most common type of appraisal, an appraisal can be ordered for other items such as contesting high property taxes or assessments, establishing a replacement cost for insurance reasons, divorce or estate settlements, a negotiating tool in real estate deals, to determine a fair market value when selling a property or if there’s a lawsuit or government agency requirement of an appraisal.

Who owns the Appraisal?

Even though the borrower will pay for the appraisal, the mortgage company or lender will own the appraisal. The mortgage company has ordered the appraisal on the borrower’s behalf and the mortgage company is listed on the report as the one requiring the appraisal. However, the borrower has a right to receive a copy even though the mortgage company will determine if the borrower receives the original report.

How to determine the market value of a property

A qualified appraiser is typically licensed in the state in which they operate. They determine a property’s value in a number of ways. Comparable sales in the area and even pending sales can be used to determine fair market value. Appraisers will research similar properties in the area to determine the right value for the home. Appraisers use sold listings within the last 3 to 6 months to determine fair market value. They do not use asking prices, as this clearly is not the sold price or the price someone would actually pay for the home. If there are very few similar properties, appraisers will look into pending sales, if they can determine the accepted offer price.

Appraisal Methods

#1. Cost approach – This is a formula used to obtain the property value by assessing the land value with the added cost to reconstruct the appraised building on the property less any accrued depreciation.
#2. Sales comparison approach – The appraiser will identify 3 to 4 comparable or similar properties that have been recently sold within the neighborhood. This includes similar square footage, number of bedrooms and bathrooms, property age, lot size, and condition.
#3. Income approach – This appraisal approach looks at the potential net income of the property to arrive at a property value. This works well with commercial properties and is sometimes used in conjunction with other methods.

Can I assist my Appraiser?

Yes! You can! And it’s to your advantage to help the appraiser perform the assessment if you provide additional information. Often, appraisers will ask the homeowner about any improvements or changes to the home that may not be evident.