A home appraisal is the process by which the fair market value of your home is assessed. A real estate appraisal is an essential component of the process of selling a property or refinancing it. Fundamentally, a state-licensed appraiser will utilize the data available to estimate your home’s current market value.
This data can come from a number of sources, and includes its location, size and state of repair, and also the market value of similar homes in your area. You are unlikely to get a loan on a home without one, and also unlikely to get a mortgage to purchase a home that has not first been appraised.
Methods Used in Home Appraisal
An appraiser will consider different aspects of your home when it is being appraised. Each of these can be used or just one of them, depending on the location and style of your home. Here are the three most common methods:
The Cost Method:
An assessment is made of the market cost of the land which you own with respect to your home. If you own an apartment then that might be irrelevant, but if you own a ranch that could be thousands of acres. For the average home, you would generally own the land encompassed by your home and front and back yards.
The value of your home would then be calculated as the value of this land plus the cost to rebuild your home on it, less depreciation through wear and tear. This approach is used more for new homes where the cost to rebuild the structure is known. It would also be used where no homes have been sold to enable the following approach to be used.
The most common approach for residential properties is:
Fundamentally, your appraisal will be based upon the value of similar homes in your neighborhood. Appraisers refer to these homes as being ‘comparables’ which have been sold within the last 180 days. Comparables, or ‘comps’ as the professionals call them, will be around the same size as your home, with the same number of rooms and amenities, and they will be located within a half mile from your home.
The comparison takes into account the number and areas of the rooms, their layout, condition, lot size and relative age. The appraiser will estimate the value of your home based upon that information. For example, if your home is exactly comparable in size to another nearby that sold for a certain figure a month ago, but you have a slightly larger lot and your home is better maintained, yours will be appraised higher than the selling price for that home.
To use this method of home appraisal, your appraiser will be looking for at least three comparable properties that have sold within the above time scale. If there have not been three, then fewer will be used and likely the Cost Method will also then have an impact on your appraisal.
Real Estate Appraisal Costs
The costs for a home appraisal will be paid by the borrower. It will be you if you are appraising your own home for refinance purposes or if you are buying a home. In spite of who pays, the appraisal is owned by the lender or mortgage company.
To summarize, then, a home appraisal is needed by anyone buying a home or borrowing money on their own home. A residential real estate appraisal is largely based upon the selling prices of comparable homes in the same area, although land and rebuilding costs can also be taken into consideration.