What is a Home Appraisal?
For those who are in the process of buying or selling a home, you may be hearing a lot about home appraisals. But what is a home appraisal, and why is it done? A home appraisal is conducted to determine a home’s fair market value. For home buyers, this helps ensure that your home loan amount is in line with the home’s worth. For sellers, it can help determine your listing price.
Two Primary Appraisal Methods
There are two primary methods for appraising homes. They are:
- Sales comparison approach – The appraiser compares the property with three or four similar homes that have sold in the area as well as homes that are currently listed for sale, which are called comparables or comps. The comparison considers the homes’ lot size, square footage of both finished and unfinished space, style and age, as well as other features such as garage, fireplace, outdoor pool, etc. This is the most common approach used in mortgage lending.
- Cost approach – The cost approach is based on reproduction costs. The appraiser estimates the cost to replace the structure on the property if it were to be destroyed. Land value and depreciation also help to determine the property’s value.
How Home Appraisals are Conducted
The appraisal process usually begins with a physical inspection of the property, inside and out. While overall maintenance of the home and property is certainly a factor, curb appeal and general tidiness will not affect the home’s appraised value. After an appraisal is conducted, you will receive a report. The appraisal report considers additional information from several sources, such as county courthouse records and recent reports from the local real estate multiple listing service.
It’s important to remember that an appraisal is not the same as a home inspection. Home inspections are important to conduct as well, as they point out potential problems with the structure, core appliances and more. While property appraisers typically note obvious issues, they won’t test systems such as your heat and air, the chimney, or plumbing.