Understanding the home appraisal report

Different types of appraisal methods

1. Sales comparison approach: Often used in appraisals, the sales comparison approach involves comparing the appraised property to similar homes recently sold in the same area. The appraiser considers factors such as size, location, condition, amenities, and recent sale prices of comparable properties to determine the value.
2. Cost approach: An appraiser may use the cost approach method for new properties or unique properties that lack comparable sales data. It calculates the value of the property by determining the cost to rebuild it, considering factors such as construction costs, land value, and depreciation.
3. Income approach: The income approach is typically used for investment properties such as rental units or commercial buildings. It estimates the property’s value by analyzing its income potential based on rental rates, expenses, and potential income growth.

What influences the appraisal value of a home?

Several factors determine the price given in an appraisal report:

• Recent sales of similar properties in the area
• Current condition of the property
• The neighborhood and its impact on future value

Recent sales

An appraiser will typically review the records of nearby properties sold in the previous few weeks or months to find three or four similar in size, style and layout. The selling prices of those homes may help determine the value of the property being appraised. Many buyers and sellers want to know how recently the comparable homes were sold, and what is defined as “within the same area.”

Appraisal criteria often varies between homes in a metropolitan area and a rural community. In a larger city, the appraiser may find similar homes sold in the previous month within one mile of the home that is for sale. In a small town or rural community, the appraiser may have to consider sales over several months or compare homes that are further away.

Current condition

An appraiser may evaluate the current condition of the selling property to determine its value and inspect the home for health and safety issues. Any violations may be noted in the final report. These include old wiring, a lack of railing along stairs and other risks. 

In addition, the appraiser might evaluate the overall design of the home and how it compares to others in the neighborhood A house that needs serious updating could have a lower appraisal value than one recently renovated.

The neighborhood

The surrounding area also plays a part in the appraisal. The appraiser may determine the current state of the neighborhood and where it is headed in the future. For instance, a home in a new or up-and-coming subdivision may have a high value, because it’s expected to appreciate in the future. On the other hand, a home in a tired-looking neighborhood that is declining instead of growing doesn’t have the same potential for value.

Getting an appraisal

The lender can request an appraisal by a licensed appraiser or rely on an automated valuation model (AVM). The seller and buyer is usually not involved in this part of the process. However, there may be instances when a homeowner can independently order a home appraisal report for informational purposes. 

The lender may determine the loan amount based on either the sales price or appraisal value, whichever is lower. If the appraised amount is less than the asking price, three things might happen:

1. The seller negotiates the price to match the appraisal.
2. The buyer brings cash to the closing table and pays the difference.
3. The buyer walks away from purchasing the home.

Adjustments

Adjustments are changes made to the appraisal value based on differences between the appraised home and recent sales of homes in the area. For example, if most houses in a neighborhood have pools but the appraised home doesn’t, the value may be adjusted by the expected added value of a pool.

Sellers can increase the chances of a higher appraisal value by fixing things needing repair and making any necessary updates. With a few improvements, they may get more money out of their homes. Although buyer doesn’t contribute to a seller’s appraisal, they should still understand the process and how it impacts their loan.

What to expect in a home appraisal report

Here’s what a home appraisal report might include:

1. Property description: Appraisers often provide information about a property’s location, age, size, and design. They may also describe the home’s condition and list any significant defects or issues that could affect its value.
2. Market analysis: The appraiser may provide an analysis of the local real estate market, including recent sale prices of comparable properties in the area.
3. Comparable sales: The report will typically include a list of recently sold properties that are similar to the appraised property. The appraiser will compare the features of these homes to the subject property and provide a valuation based on these comparisons.
4. Valuation: The appraiser may provide an estimated value for the property using one or more of the appraisal methods mentioned earlier. A valuation usually considers the property’s location, condition, size, and any unique features.
5. Photos: A home appraisal report will typically include several images of the property, both inside and outside. These photos document the property’s condition and provide evidence of any significant defects.
6. Additional documents: A report may include other documents, such as maps, floor plans, or zoning information which provides additional information about the property and its location.
7. Appraiser’s certification: The appraiser might include a certification stating they conducted the appraisal in compliance with industry standards and guidelines. The certification also confirms that the appraiser has no interest in the property, they received no compensation other than the appraisal fee, and they have no bias or conflicts of interest.

Frequently asked questions about appraisal reports

Why is a home appraisal necessary?

A home appraisal determines the fair market value of a property. It primarily helps lenders assess a property’s worth when providing a mortgage.

Who performs home appraisals?

Licensed and independent professional appraisers or mathematical models carry out appraisals. 

How long does a home appraisal take?

Several factors can impact the timing of the home appraisal process. First, scheduling will depend on the type of appraisal taking place, and in the case of an in-personal appraisal, the availability of an appraiser in the area. Once an appointment is scheduled, the duration of the appraisal may vary depending on the size and complexity of a property. After an appraisal, it may take anywhere between a few hours and a few days to receive the final report.

Can I influence the outcome of a home appraisal?

While you can’t directly influence your home’s appraised value, you can make sure your property is in good condition, provide information about recent renovations, and share any relevant documents with the appraiser.