An appraisal is a written estimate of a property’s market value completed by an appraiser. The value is based upon a market analysis of recent sales prices for similar properties in the area, and the property’s physical condition. The appraisal is performed by an appraiser, an objective third party whose job is to give their professional opinion of the market value of a home. An appraisal is the appraiser’s opinion of the property’s value based on their knowledge and evaluation of the property. This opinion or estimate is developed using the three standard approaches to property valuation: The Cost Approach estimates what it would cost to replace or reproduce the improvements as of the date of the appraisal, with deductions for issues like physical deterioration. This is added to the land value to determine that value of the property. The Comparison Approach looks at properties of similar size, quality and location that have recently sold in order to derive a comparative value. Variations between the properties are factored into the valuation by adding or subtracting amounts to adjust for things like more bathrooms, a smaller lot, etc. The Income Approach is generally used for commercial properties, and is not typically relevant for residential property valuations. The income approach estimates the value of the property based on upon the net income the property produces.
Lenders use the appraisal to determine the appropriate loan amount. Because home values can vary considerably, even in the same neighborhood, it’s important for the lender to have an objective opinion of the value of a home before making a loan that will be secured by the property. A lender will not lend more than the value of the home, and the appraised value is used to determine common loan ratios that factor into the loan approval process, such as loan to value (LTV).
An independent appraiser hired by the lender performs the appraisal of a property. Appraisers are trained to value properties, and they are licensed by each states through the Division of Commerce. An appraiser must meet specific criteria in order to be licensed. The appraiser does not handle valuables, so they do not need to be bonded. However, most appraisers do carry liability insurance to cover accidental damage to the property that may occur during the course of the appraisal.
The lender hires the appraiser, and the fee for the appraisal will be included in the borrower’s closing costs, and outlined in the Good Faith Estimate. Generally, the lender has a relationship with a thirdparty firm that specializes in performing appraisals, allowing them to quickly assign a qualified appraiser to evaluate the property.
The appraiser’s client is the lender, not the borrower or seller. Typically, an appraiser works for an appraisal firm or they may be self-employed. Either way, they appraiser is not generally affiliated with the lending institution, and therefore they are an independent and objective professional.
A seller may hire wish to hire appraiser to value their home before selling the property. However, the lender most likely will not accept this appraisal for the purposes of the loan approval, so another appraisal will need to be done by an appraiser the lender selects. The cost to the seller for this presale appraisal will be about $300-500.
The physical inspection of a typical property does not take long. Most appraisals only take 10-15 minutes, unless the house is difficult to measure or has some unique features that require additional investigation by the appraiser. During the inspection the appraiser will take photos to document the condition of the property and any special features of the home. After the initial property inspection, the appraiser may tour the neighborhood and identify other properties that are similar to yours. They may also search property records to locate “comps” or comparable properties that have recently sold. The appraiser takes pictures of these properties to include in the appraisal report. The appraisal report uses a standard format, and takes about four hours of work to complete. You can expect the appraisal report to be completed and delivered to the lender within a day or two of the property inspection.
During the inspection, the appraiser measures the house from the outside to determine square footage. This external measurement is standard throughout the industry. Usually no interior measurements are required. The appraiser takes notes concerning the features of your house such as room layout, number of bedrooms, baths, etc. The appraiser also makes a determination of the general condition, appeal, and functional layout of your house. All of these items are taken into consideration in the appraisal report. Other items that may be considered are:
- General condition and age of the home
- Size of home and property
- Location of the home
- Features of the home (i.e., 3 bedrooms, 2 baths, etc.)
- Major structural improvements, such as additions and remodeled rooms
- Architectural features, such as skylights and fireplaces
Items that usually contribute very little to value are swimming pools, finished basements, landscaping, new roofs, new furnaces, etc. Concerns about property conditions that may require the home buyer to invest more in maintenance to sustain the property value, such as upkeep on a private road, may also be an issue.
The most important thing you can do to prepare you home for an appraisal is to make sure all the maintenance you can do is done before the appraiser arrives. This includes yard work and clutter removal, as well as any painting, new flooring or other improvements you plan to make. Inform the appraiser of any upgrades and home improvements such as new windows, floors, the finished basement, etc. Keep the receipts and have them available if the appraiser asks to see them.