No matter if you’re buying a new home, selling, or refinancing, you’re going to need to get your home appraised. Appraising your home helps the lender can make an informed decision on how much money to loan while buyers and sellers can both be confident the required financing won’t fall through. We’ll go why appraisals matter, and what to do once you have the appraisal in hand.
In this article
What is a home appraisal?
A home appraisal is when a third-party professional assesses your home’s value and reports it to all the people involved in a real estate transaction. The buyer, seller, and lender all need to know how much the home is worth, in order to set up the real estate transaction for success. Lenders want to make sure they’re not lending more money than the home is worth, buyers want to make sure they’re paying the right price, and sellers want to make sure an offer won’t fall through due to a low appraisal. Having an unbiased third party perform an assessment on what the home is worth gets everyone involved on the same page, so there will be no surprises later.
How do home appraisals work?
More than anything, a home appraisal helps protect the lender by helping them determine the appropriate amount of money to loan out. A lender will request and book the appraisal, but the borrower will often pay for it. In some purchase agreements, the seller might agree to pay for it as a concession to the buyer.
All 50 states require that appraisers be certified by their appraisal agencies and that they have no personal connection to the property that may sway their analysis. Once they have appraised the property, they’ll prepare an appraisal report and deliver it to the lenders, seller, and buyer.
The appraiser is required to do five things:
1 Perform a complete visual inspection of the interior and exterior areas of the property
2 Inspect the neighborhood
3 Inspect each of the comparable sales from the street (or a larger area)
4 Research, verify, and analyze data from reliable public and/or private sources
5 Report their analysis, opinions, and conclusions in an appraisal report
Appraisals are not necessarily in-depth, detailed inspections. But, generally, the more sale-ready the home, the higher the appraisal so it’s always a good idea to boost a home’s curb appeal and do cosmetic improvements wherever you can.
The three types of appraisals
Not all appraisals are the same. There are three main types of appraisals for different properties and transactions.
Market approach
Also known as Sales Comparison Approach, this method is based on a comparison with similar property sales in the area. Must include at least 3 sales closed in the past 12 months.
Income approach
This approach allows investors to estimate the value of a property based on how much income it will bring in. Divide the net operating income of rent by the capitalization rate to estimate a value.
Cost approach
As the value of the property is dependent on completion of the project, most construction lenders require this method. To calculate the value, take the cost of improvements less the amount of depreciation plus the estimated value of the site if vacant.
A home appraiser will compare your home to similar homes in the area to get a sense of what other buyers would pay for it—these comparisons are called comps.
