Home Appraisals for Dummies

Your home is the place you reside in and share with loved ones. Your house is the building in which you live with those loved ones. Your home is worth much more to you personally than any house is worth in the market place

An appraisal is determining the value of your house in its present day market. The most common appraisal determines market value and is completed on a standardized form approved by lending institutions. Market Value is the most probable price a property should bring in a competitive and open market with the buyer and seller each being knowledgeable.

What you paid for your house may or may not be representative of what it is worth in the market today. You may have been willing to pay more for a certain feature than your neighbor would pay for that feature. So, price and value are not the same. Also, markets can fluctuate from year to year. Let's look briefly at how market value is determined.

There are three approaches used in determining value. First is the cost approach. It can determine reproduction cost, the estimate of what it would cost to replicate the property exactly as it is using original workmanship and materials, or the replacement cost which is what it would cost to replace it using current workmanship and materials. Replacement cost is used in most market value appraisals.

The second approach is the Income Approach that is used for commercial properties and investment properties because it reflects the value of the property based on expectations of rent being received.

The Sales Comparison Approach is the most commonly used approach to determine the market value of a residential property . To come up with a market value, an appraiser will measure the exterior walls of your home to determine the square footage of the heated and cooled (finished) area in your house. If you have a second floor or a finished area in your basement, it will be measured from the inside. The appraiser will then walk through your house to note all the amenities, such as fireplace, insulated windows, garages and porches and decks.

The appraiser will find at least three properties that have sold in your neighborhood or a competitive neighborhood within the last 6 months to a year. These comparable properties must be similar in design, age, size, quality of construction and other amenities such as those mentioned above.

Rarely do you find a perfect comparable so adjustments are made for each different feature on the market grid on the appraisal form. For instance, if comparable 1 has only 2 bathrooms and your house has 3 bathrooms, the appraiser will make a positive adjustment to the sales price of comparable 1 to make that property equal to yours. Adjustments are made for each item. There is a limit to the amount of adjustments underwriters reviewing the appraisal will approve so it is important that the appraiser find comparables as similar to yours as they can. After all adjustments are made, the appraiser looks at the three adjusted prices and weighs the differences in those properties versus the subject property and comes up with a market value.

Foreclosures should not be used as comparables as they do not reflect true market value. The appraiser must follow guidelines in making adjustments and coming up with a market value. Remember, the market value stated in the appraisal is a reflection of what is going on in your market area at this particular time.

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