Outline of Appraisals in Residential Real Estate Transactions
By Sadiya Anjum
The term ‘Appraisal’ implies both the opinion of the value of a property as well as the process of valuation. An appraisal will determine the fair market value of a property. It basically indicates how much a property would sell for if it were put up in an open and competitive market. When an appraisal is conducted, it does not add or depreciate the value of a home, it simply determines the value of the home with respect to the current real estate market.
An appraisal can be used for several reasons such as mortgage purposes, homeowner’s contesting high property taxes, homeowner’s contesting high premiums (for insurance) charged based on annual appreciation increases etc. When buying or selling a home, an appraisal can give both parties a better idea of the value of the property thereby helping them to determine the purchase /sales price. But an appraisal is rarely initiated by the buyer or seller. An appraisal in typical residential transactions comes into play when the buyer has to be approved for a loan. It is then that the lender arranges for an official appraisal.
An appraiser will judge various aspects of a home. Some basic aspects include the site, amenities, additional features in the home and physical condition of the property. It really is not about the superficial condition of the home; meaning clutter and too much furniture will not be considered. His judgment is based on specific parameters; he will take measurements and delve into other such details.
For residential properties, there are two basic methods that appraisers employ:
Cost Approach: This method is used when a building is relatively new and the costs of construction are known. The appraiser will determine the value by estimating the cost of replacement of the structure if the property was destroyed.
Comparative Approach: More commonly known as the Sales Comparison method bases its estimate by comparing the property in question to other similar properties sold recently in the area. Basically similar properties are found and depending on their features and your home’s features, value would be added or subtracted to your home. Other estimates are also made such as what a ‘comp’ would have sold for if it had a particular feature unique to your home.
An appraisal report will indicate the value of the home, any major structural flaws or issues that may depreciate the value of the property, the areas’ general market value, comparison to three other similar homes etc. It is important to note that an appraisal should not be confused with the Comparative Market Analysis (CMA) which an agent may conduct. A CMA also employs the method of comparables to roughly estimate the value of the home. An agent usually does a CMA to help the seller determine the sales price. A well done CMA may determine a value close to the appraised value of the home but it is not accepted by banks or lenders.
An appraisal is again not to be confused with a home inspection. A home inspection delves deeper into the physical condition of the home and analyzes finer details that an appraisal may not.
Appraisals, as mentioned before, are usually ordered by mortgage lenders to safeguard their interests. They will only approve the loan amount if the appraisal verifies the negotiated and agreed upon sales price by both the buyer and seller. Lenders simply check to see that if the borrower defaults, then the collateral (home) will be worth it. Even for government sponsored loans, an appraisal is necessary as the government will not cover for the borrower if there are discrepancies in the sales price and appraisal.
An appraisal plays a major role in real estate transactions. One must make sure that the appraiser chosen should be a neutral third party and is licensed by the state. An appraisal will give all parties involved a clearer picture of the value of the home.
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