Denver Homes victoria Macaskill

OCT
1

About Appraisals

Posted by Victoria Macaskill

A home appraisal is an important part of every real estate transaction. An appraisal is an independent, detailed report that helps establish a property's market value. The buyer's lender usually determines whether the buyer will pay for the appraisal upfront or if the appraisal will be included in the closing costs, which are sometimes covered by the seller.

The Lender generally orders the appraisal through an Appraisal Management Company (AMC). In the past, Lenders ordered appraisals directly from appraisers; however, all Lenders must now order the appraisal through an AMC. This process ensures that the appraisal is unbiased and is in no way influenced by the Lender. Lenders use the appraisal to determine the mortgage loan amount.

All appraisals are performed by a licensed appraiser who should be an objective third party with no financial connection or other connection to any person involved in the transaction. The appraiser will usually inspect the property - inside and out - and take interior photos including all bathrooms, kitchen(s), and living areas. Appraisers will also measure the house to obtain an independent opinion on square footage. By obtaining this detailed data, appraisers can conclude the current market value of the property.

Appraisals are very detailed reports, but here are some things they include:

  • Details about the subject property, along with side-by-side comparisons of three similar properties.
  • An evaluation of the overall real estate market in the area.
  • Issues the appraiser feels are detrimental to the property's value.
  • An estimate of the average sales time for the property.
  • What type of area the home is in.

The appraiser can determine a property's market value using the following 3 methods:

Sales Comparison Approach

The Comparison Approach is the most widely-used approach and the most accurate because of the fluctuation of the market. Appraisers identify homes in the area that have recently sold and compare them to the subject property. Lenders generally expect appraisals that analyze three comparable properties. Proximity in both timing and location are important in a sales comparison analysis. Ideally, the appraiser uses sales that have concluded within six months of the appraisal and within one mile of the subject property. Price adjustments are made for differences in the comparables and the subject property.

Cost Approach

The Cost Approach combines an estimate of land value with an estimate of depreciated reproduction or replacement cost of the improvements. This approach is a best estimate of what it would take to replace the existing structure at current market rates. The Cost approach is commonly included in every appraisal.

Income Approach

The Income Approach is usually used for investment properties or typically used only if the home is in an area with a lot of rental properties.

 

There are a number of reasons why an appraisal may come in low. Here are a few:

  • Declining market values due to fewer buyers shopping among a larger inventory of homes.
  • An abundance of foreclosures or short sales in the neighborhood.
  • Overpricing by the seller.

If the home was overpriced or the value was inflated, often the best solution is to lower the sales price. It makes the buyer happy, and the lender is satisfied. In every case, the Lender will study the appraisal carefully before determining whether or not the property qualifies to serve as security for a loan.

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