Daily News

MBA Urges Regulators To Avoid Invoking Suitability Standards
The Mortgage Bankers Association (MBA) recently made a preemptive strike against what it obviously perceives as the next threat against the mortgage industry - "suitability standards." Read more...

 

Home appraisal 101

By Justin Hunter

Whether you are buying, selling or just curious a home appraisal can end up being the deciding factor of whether you conduct a real estate transaction. The appraisal will basically determine a fair listing price for the property.

But just like a home inspection, an appraisal depends on many factors and once you receive the actual value, you must keep in mind that national and local market changes could have an immediate effect on what the property should be sold for.

So, then someone comes into your home and crunches some numbers over an hour or two and hands you an invoice with the determined value. What if it seems too low or even too high? The article, “How do appraisers calculate home's market value?” posted on Inman News on November 2, 2006, provides the methods used to determine a property’s value.

There are three common methods appraisers use to determine a properties value. However, not all of these methods need apply depending on outside circumstances.

The first method appraisers use is the replacement-cost approach. “This appraisal method involves multiplying the square footage of the structure by the current construction cost for comparable quality to arrive at the estimated replacement cost of a building.”

Insurance agents often use the replacement-cost approach to arrive at a recommended replacement-cost insurance coverage for houses.

The next method is the rental-income approach. This appraisal method is most appropriate for appraising apartment buildings, shopping centers, office buildings warehouses and other rental properties.

“The net income, minus a vacancy estimate, is capitalized (based on the local capitalization rates for recent sales of similar income properties) to determine the estimated market value of the subject property. Appraisals of single-family houses and condos do not usually include this method unless the neighborhood is primarily occupied by tenants rather than owner-occupants.”

Even if a house is used as a rental property, this method is not best to determine its appraisal value because homes are compared with home sales prices, not rental prices.

The last method is the comparable sales approach. This is the most important appraisal method to determine the market value of a house.

In order to be as accurate as possible, the sales prices of comparable nearby residences must be recent. Sales prices more than six months old are usually disregarded in appraisals unless the neighborhood has seen very little activity during that time period. In either a rising or declining home market comparable sale are preferred within three months.

“Because this is the most important appraisal approach for houses and condos, the experience of the appraiser becomes critical to determine what is a truly comparable similar nearby residence. However, adjustments must usually be made to both the ‘subject property’ being appraised when comparing it to the comparable nearby home sales, and to the comparables, to compensate for the pros and cons of each residence.”

For example, if the house that is being appraised has three bedrooms and it is compared to properties with four bedrooms, the appraiser must subtract the necessary value of one less room. And vice versa if say the comparison home does not have a family room and the appraised home does, then value will have to be added.

No home is exactly the same, so an appraiser will need to make the necessary mathematical correction.
Having a home appraised is a very valuable tool when deciding to buy or sell but do not just take the appraiser’s word for it. If the value seems off, just go online to check neighboring house value. If the structure is similar (same amount of rooms, etc.) but the value is much different, you may want to contact a different appraiser.

Back to Articles