How Do Appraisers Determine Home Value? Find Out Now!
If you’re new to the real estate market, you might be wondering: How do appraisers determine value? Whether you're contemplating selling your home, refinancing your mortgage, or simply curious about where your property stands in today's market, grasping the appraisal process is essential.
In this blog post, we’ll answer two important questions: what do real estate appraisers look for? And how do they determine value? We'll dive deep into the methodical approach appraisers take to arrive at a property's value, and why it plays a critical role in almost every real estate transaction.
Key Factors in Determining Property Value
When it comes to evaluating a home's worth, appraisers take into consideration several factors.
Location
Homes in areas with easy access to amenities, schools, shopping, employment and public transportation may command higher prices when compared to more rural areas.
Location encompasses not just the city or neighborhood but also the specific placement within that area – for example, the appraiser must give consideration if a home backs to a commercial area compared to a house backing to a pond.
Condition of the Property
During the home appraisal process, the appraiser examines the overall condition and age of the property. A brand new or well maintained home is more likely to receive a higher valuation compared to an older home with deferred maintenance.
Key aspects include considering if the home is safe, sound and secure? This includes the overall integrity of the house, general observation of key components such as the roof and flooring and any signs of neglect or disrepair. An appraisal is not a home inspection, but a general observation of condition.
Improvements and Renovations
Recent upgrades and home improvements can significantly enhance a property's value, especially if they improve functionality or aesthetic appeal.
Kitchen remodels, bathroom updates, and added square footage are examples of improvements that can positively influence an appraisal.
Appraisers assess the quality of the renovations and their impact noted within the market, ensuring that the enhanced value aligns with what's typical for comparable homes.
Market Trends
Appraisers stay abreast of current market trends to understand how they might affect property values. A booming market might see values rise due to increased demand, while in downturns, values could stagnate or decline. Understanding these trends allow appraisers to contextualize a property's value accurately.
Comparative Market Analysis (CMA)
A CMA is one of the tools an appraiser can use to evaluate trends in a market area by comparing similar type properties. A study of various CMA’s may provide support for a specific adjustment, such as a location adjustment or an adjustment for acreage.
By comparing the subject property (house being appraised) to others that have recently sold, and adjusting for differences in size, condition, and features, appraisers can derive a value that reflects the current market conditions.
This method ensures that the appraised value is grounded in real-world transactions, providing a fair assessment of what the property is likely to sell for if placed on the market.
If you want to learn more about the factors that affect your home valuation check out this article.
Real Estate Appraisal Methods
Appraisers use various methods to determine a property's value, each offering a different perspective for supporting a final value opinion. Here's a closer look at the three primary appraisal methods:
Cost Approach
The cost approach is based on the principle of substitution, estimating what it would cost to replace the property if it were destroyed.
This method calculates the property's value by adding the land value to the current cost of constructing a replica of the existing building, and then subtracting an estimated depreciation.
Depreciation refers to the decrease in value from factors such as physical wear and tear (roof, flooring, HVAC, etc).
This approach is particularly useful for new buildings where the costs are more straightforward to determine or for unique properties that aren't easily compared to others.
Sales Comparison Approach
The sales comparison approach involves comparing the subject property to similar properties, or "comparables," that have recently sold in the same area.
This method relies on the principle of substitution, asserting that a buyer would pay no more for the property than the cost of purchasing an equivalent substitute. The accuracy of this approach relies on the availability of comparable sales data and the appraiser's skill in making appropriate adjustments. This is by far the most common approach used by appraisers and in many situations is considered the most reliable.
Income Approach
The income approach is primarily used for investment properties or any property that generates rental income.
This method calculates the property's value based on the income it produces, considering the present value of future income streams. Appraisers estimate the GRM (Gross Rent Multiplier) and multiply it by the estimated rental income based on market research of similar properties.
Generally speaking, the income approach is used less often as the primary method of determining a value opinion, but may serve as additional support to the sales comparison approach.
For more in-depth information on home appraisal methods, check out this article.
The Appraisal Process
Here's an overview of the steps an appraiser typically takes from the initial observation to the completion of the appraisal report:
Initial Observation:
The appraiser conducts a thorough observation of all areas of the property to assess its condition, size, features, and any improvements or renovations. This step is crucial for gathering firsthand information about the property and identifying any factors that might affect its value.
Researching the Local Market:
After visiting the home, the appraiser researches the local real estate market to understand current trends relative to the subject. This research helps the appraiser contextualize the property within its broader market environment.
Analyzing Comparable Sales (Comps):
The appraiser selects similar properties that have recently sold within the area and compares them to the subject property.
Applying the Appropriate Appraisal Method:
Depending on the property type and data available, the appraiser will apply one or more of the appraisal methods discussed earlier (cost approach, sales comparison approach, or income approach).
Preparing the Appraisal Report:
The final step in the appraisal process is the preparation of the appraisal report. This comprehensive document outlines the appraiser's findings, including details of the property observation, the market research completed, the comps analyzed, and the rationale behind the chosen appraisal methods. The report ends with the appraiser's determined value of the property.
Review and Delivery:
Before delivering the report to the client, the appraiser reviews all calculations and findings to ensure accuracy and completeness. The final appraisal report is then presented to the client, providing a detailed and substantiated valuation of the property.
Challenges in Determining Value
The process of valuing a property is complex and can be influenced by a range of challenges and variables, including:
Unique Properties
Properties with unique features or unconventional designs may lack direct comparables, making valuation more difficult. Appraisers must rely on their expertise and possibly a wider range of comps to estimate value.
Lack of Comparable Sales
In areas with low turnover or for properties that are significantly different from those in the surrounding area, finding recent and relevant comparable sales can be challenging. This may require the appraiser to look at comps from other nearby areas and adjust for location differences.
Fluctuating Markets
Rapid changes in the real estate market, whether due to economic shifts, changes in interest rates, or other factors, can affect property values quickly. Keeping up with these fluctuations and understanding their impact on value is a constant challenge for appraisers.
Understanding the Appraisal Report
An appraisal report provides a comprehensive overview of the appraiser's findings and the rationale behind the appraisers opinion of value. Key elements typically included in the report are:
Property Description: A detailed account of the property and its features, including size, condition, bath count, garage count, bedroom count and added improvements.
Market Analysis: Information on the local real estate market, including trends and conditions that influence value.
Valuation Method(s) Used: Explanation of the appraisal method(s) applied (cost approach, sales comparison approach, or income approach) and the reasoning behind the chosen method(s).
Final Appraised Value: The appraiser’s professional opinion of the property’s market value will clearly be identified within the report.
Understanding how to read and interpret this report is crucial for homeowners, home buyers, and sellers to grasp the factors influencing the valuation of their property.
The Impact of Appraisals on Real Estate Transactions
The value determined by an appraisal significantly impacts various aspects of real estate transactions:
Buying: For buyers, the appraisal ensures that they are not overpaying for a property. Lenders typically will not approve loans for more than the appraised value.
Selling: Sellers use appraisals to set realistic selling prices. A property priced well in line with its appraised value is more likely to attract serious buyers.
Refinancing: Homeowners looking to refinance their mortgage need an appraisal to determine the loan-to-value ratio, a key factor in loan approval and terms.
Lending Decisions: Lenders rely on appraisals to assess the risk of a loan. A property appraised at or above the loan amount reduces the lender’s risk, facilitating loan approval.
Whether you're stepping into the property market for the first time or you're a seasoned player, recognizing the value of a comprehensive property appraisal is key. Equip yourself with the knowledge of what to expect from the appraisal process and how to effectively use the insights it provides.
If you're preparing for a property transaction, contact us and we’ll offer you the clarity and accuracy you need to navigate your real estate journey with confidence.
