How Appraisers Determine Home Values
Appraisals are used for several reasons. They’re used when a home is being sold (especially if it’s a financed purchase), when an owner is refinancing their current mortgage, and/or when taking out an additional mortgage on the current home. Some may optionally get an appraisal done on the home for other purposes but it’s primary purpose is to verify a home’s current value. Estimating a home’s value may be subjective but there are several specific tools that an appraiser will use to prepare their report. Here are a few things to know about how an appraiser determines home values.
The sales comparison approach identifies homes that are nearby and fairly comparable. Homes within the same neighborhood will definitely be included, if possible. Proximity of location and timing are of importance. Most appraisers will only consider homes that are within a set distance away and only within the last six months of closed transactions. Other variables that are considered are; style of home, acreage, square footage, year built, and area. Additionally, although they may use active listings and pending listings within their report, sold homes that were publicly advertised on MLS carry the most weight.
Using the sales comparison approach, an appraiser will make specific adjustments to each individual property in an attempt to best compare apples-to-apples. There’s a systematic spreadsheet that appraisers will work through to adjust accordingly. They may make adjustments based off; age of the home, quality of construction, acreage, square footage, style of home, total bedrooms, total bathrooms, functional utility, HVAC systems, garage, porches, decks, fireplaces, amenities, and/or neighborhood. So if a comparable home sold had one less full bathroom than the subject property, the appraiser use a positive value to adjust the sold value up in an attempt to guess the subject property’s value. Each line item is done in this same manner to get several adjusted values. The sales comparison approach, then takes all of these adjusted numbers to average out an estimated value.
The other way that an appraiser may estimate a value is the income method. This method takes a look at what a property may produce in monthly/annual income. Although better used for commercial properties, this may prove useful for residential properties as well. The income method will determine what a monthly rent value is and then multiply it times a gross rent multiplier. The gross rent multiplier is a ratio of a property’s price and it’s rental income before expenses.
Appraisers have several ways to estimate value. They could predict based off what it would be to build a new home and then subtract depreciation and add in land value. They could carefully review what similar homes have sold for recently and make specifics adjustments based off commons features. Or they can look at how much a property can earn. Although there are multiple methods for appraisers to use for their reports, the most normal method is the sales comparison approach. Those little differences in features could equate to a different appraisal amount. Interested in seeing a sample appraisal? Take a look at a sample appraisal report from Freddie Mac.
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