You've found your dream home. The asking price is $200,000 -- an amount you've already been pre-approved for by your bank. But is the home really worth that amount? That's the question at the heart of the home appraisal. The value of the property will determine how much a lender is willing to loan to you.
A home appraisal will determine if the asking price is lower or higher than the actual value of the property. A real estate appraisal is simply the expert opinion of a certified, state-licensed professional who determines the value of a piece of property. If your $200,000 dream home appraises at only $140,000, then the home is overpriced. A home appraisal protects the bank from getting stuck with property that's worth less than what they loan to a borrower. And it protects you from paying too much for a house.
Home Appraisal Methods
When you apply for a mortgage, your lender typically requires the property to be appraised by one of their approved appraisers. This practice helps create more consistent appraisals and gives you assurance that the appraiser is properly licensed and certified. You usually pay for the appraisal as part of your mortgage costs at the time of closing. The cost is typically around $300, but can be more depending on the price of the property.
There are two primary appraisal methods for residential property:
- Sales comparison approach - The appraiser compares the property with three or four similar homes that have sold in the area, often called comparables or comps. The analysis considers things such as lot size, square footage of finished and unfinished space, style and age of the house, as well as other features such as garages and fireplaces.
- Cost approach - The appraiser estimates the cost to replace the structure if it was destroyed. The appraiser then looks at land value and depreciation to determine the property's worth. This method is used more for new construction homes.
Home Appraisal Process
An appraiser gathers information from a number of sources, but the process often begins with a physical inspection of the property inside and out. Additionally, the appraiser may look at county courthouse records and recent reports from the local real estate multiple listing service. The appraisal report generally includes:
- An explanation of how the appraiser determined the value of the property.
- The size and condition of the house and other permanent fixtures, along with a description of any improvements that have been made and the materials used.
- Statements regarding serious structural problems such as wet basements and cracked foundations.
- Notes about the surrounding area, such as new or established development.
- An evaluation of recent market trends of the area that may affect the value, and a comparative market analysis that supports the appraisal.
- Maps, photographs and sketches.