Appraisal

From Debt Free Dude
Jump to: navigation, search

An appraisal of a piece of property is a detailed analysis to determine its market price. The only thing that truly determines market price is an agreement between a buyer and a seller. Appraisals attempts to determine what this amount would be by looking at the selling prices of other similar properties.

The home appraisal process is commonly used by banks and lenders to determine the maximum amount they are willing to loan on a particular piece of property. By only lending a percentage of the appraised value (usually 80%), banks can be fairly certain that they can recover their investment by selling the property if they are forced to foreclose.

Appraisals typically cost $200-$500 and are usually part of loan closing cost.


Appraisal methodologies[edit]

There are a number of different ways to calculate the value of a piece of property. An appraisal is usually trying to predict what price a buy and seller would agree upon in an arms length fair market transaction.

Of the three methods listed below, the comparable sales methodology is usually the one that carries the most weight because it uses other sales to determine what price a buyer and seller might agree the property is worth.

Cost to build[edit]

This method of appraisal determines how much it would cost to rebuild a house under current market conditions. This value is then reduced by an amount that the house is said to have depreciated since it was constructed.

So a 20 year old house that would cost $150,000 to rebuild, but needs new carpet, a new roof and could use a new heater might be said to have depreciated by $60,000. In this case the cost to build appraisal would list the value of the house at $90,000.

This type of valuation isn't particularly accurate and is rarely used as the primary value for an appraisal.

Income value[edit]

This approach looks at the rental value of other similar property in the area and assigns a value to the property based on what an investor might be willing to pay given the property's income potential. The idea is to come up with a value that represents the marketability and potential to find renters.

This value may carry more weight in areas where there are a high number of houses for rent. In areas with few houses for rent, this method of valuation is rarely even calculated.

Comparable sales[edit]

This is usually the appraisal methodology that is given the most weight. In involves finding 3 to 5 other similar homes that have sold recently and then making adjustments for the differences. Each of the comparable homes has its price adjusted up or down to try to find out how much it would have sold for if it were the same as the home being appraised.

For example lets say that the house being appraised has 3 bedrooms, 2 bathrooms and a 2 car garage. One of the comparable houses recently sold for $150,000 and it has 3 bedrooms, 2 bathrooms and a 1 car garage. The $150,000 might be adjusted up by $4,000 to reflect the price that the $150,000 would have brought if it had of had an additional garage stall.

Each difference between the house being appraised and the comparable houses is adjusted in this manner. The idea is to choose houses that require as few adjustments as possible. This process compares:

  • The quality of construction.
  • Basement or lack thereof.
  • Square footage.
  • Number of bedrooms.
  • Number of bathrooms.
  • Outbuildings.
  • Garages & Carports.
  • Air conditioner and heating systems.
  • Lot size.
  • View.
  • etc.

In the end you end up with a list of values that show what someone might have paid for the comparable houses if those houses were adjusted to be identical to the property being appraised. Typically, these values are then averaged to get a good idea of what the property in question is worth.

Appraisal FAQ[edit]

Here are some frequently asked questions and answers about appraisals.

What is a typical home appraisal process?[edit]

Usually your lender will order a home appraisal from one of their pre-determined qualified appraisers in your area. The appraiser will call you and make an appointment to come spend an hour or two looking over your house. Within about a week, they will send a copy of their appraisal to the lender. You should be able to request a copy of this from the lender and look it over for any errors. In some cases you may be able to increase the valuation by catching mistakes or things that were overlooked.


Who orders an appraisal?[edit]

Usually the finance company or bank will take care of ordering an appraisal. In some cases the bank has to be the one to order it. You can order an appraisal yourself, but the bank may order their own again--even if they have the same person do it!

How are houses appraised?[edit]

Houses are appraised in several ways. The goal is to determine what would be a selling price that is high enough the seller will accept it and low enough the buyer will pay it. The most common way is to look at how much other similar houses have sold for in the area recently. Another method is to calculate how much it would cost to build the house from scratch and then subtract for depreciation. A third method calculates the value based on the rental potential of the property.

Are appraisals accurate?[edit]

Appraisals can give you an idea of what an average house in your geographical area would sell for. However that doesn't tell you a whole bunch about what your specific house will sell for because it is impossible to account for individual tastes and home buying usually isn't done strictly by the numbers as an investment.

How can I make an appraisal higher?[edit]

An appraisal wouldn't be valuable if it was easy to influence the value. Appraisals should represent the true value that a buyer is likely to pay. The only way to increase the amount a house appraises for should be to increase the value of the house.

That said, doing things to youd house that will make it more attractive to potential buyers may be able to help raise the value of the appraisal. Houses are rated as being in "poor", "average", "fair", or "good" condition. If you can move your house from a lower category to a better one, it may increase the amount of the appraisal. Here are a few ideas:

  • Paint the walls. Painting not only makes the walls look better, but it can help make your house smell fresh and new.
  • Fix any broken fixtures. As your house gets older it depreciates. Fixing the small things that break on a house as it ages will help reduce the amount of depreciation the appraiser calculates.
  • Clean the house. While this shouldn't directly impact the appraisal price, it will make the house seem a lot nicer and could influence which other houses yours is compared with.
  • Decorate tastefully. Anything that will make your house look nicer and modern will likely help it on the market and on the appraisal.
  • Add an outbuilding. Outbuildings can sometimes contribute more in value than what they cost. It depends on a lot of factors, but it is worth considering. A shed from Lowes might increase the value of your house.
  • Have a neat yard. Make sure the grass is mowed recently and that the yard is neat and tidy.
  • Property description Make sure the appraiser knows the actual dimensions of your property. For example, if you own an adjacent piece of land that is part of your property, make sure it gets included in the appraisal.
  • Hide the dog. Pets in your house are going to be associated with damaged carpets, etc. Take Fido to a friends house and put up his food and water bowl the day of the appraisal.
  • Move some stuff out. The appraiser is going to physically measure each of your rooms. However a crowded room is still going to seem less desirable than an open room. Consider moving extra furniture to a friends house or the garage for the appraisal.

How much does a garage add to the appraised value?[edit]

In most situations a garage will increase the appraised value of a house. However, it might not increase it by more than the cost of putting in a garage. If a house appraises for $100,000, adding a $20,000 garage might only up the value of the property by $10,000. It depends on a number of different factors.

In some situations an out building will increase an appraisal by more than the cost of the building. Home Depot and Lowes sell inexpensive sheds and in the right area, the standard value given for a shed may be greater than what it cost to purchase the small out-building.

Can you predict how much a house will appraise for?[edit]

Yes and no. While it is hard to be able to tell for sure, a qualified real estate agent should be able to give you a pretty good range by pulling a list of comparable houses that have sold recently.