What Is A Home Appraisal?
A home appraisal is the process by which a licensed person assigns a “fair market value” to a property. Appraisals are performed by professionals known as appraisers. With photos, research, and analysis, home appraisal reports can sometimes stretch to 30 pages of more.
The appraisal process helps to determine whether a home buyer is over-paying for a home relative to similar for-sale homes. This protects the buyer and the mortgage lender providing financing on the home. Home appraisals are used for refinance loans, too.
Depending on a home’s appraised value, a borrower will get access to different mortgage rates and options and may even get to submit less documentation as result. However, home appraisals don’t always come in “at-value,” which is to say that — sometimes — home appraisals assign a home value that is less than for what you hoped or planned. What do you do then?
How Appraisers Determine A Home’s Value
With the exception of no-appraisal, streamlined refinance loans, nearly every mortgage application requires a home appraisal to get approved. The most common method of appraisal for home buyers and existing homeowners who plan to live in the home getting financed, is called the “Sales Comparison” method.
When using the Sales Comparison appraisal method, a home appraiser compares the subject property (i.e. your home) to other homes with similar physical attributes in the immediate vicinity. “Immediate vicinity” varies by region. In a dense city such as Seattle, Washington; Chicago, Illinois; or, San Francisco, the immediate vicinity for a home will be within 0.25 miles — usually not more than a few city blocks. In less-dense areas, the immediate vicinity of the subject property could range to several miles. Appraisers are most interested in similar homes within these areas. They look at such traits as: number of bedrooms; number of bathrooms; age of home; quality of home finishes; and square footage.
They also consider the “appeal” of a home based on its school districts, and proximity to traffic and shopping, as examples. Then, for each comparable home, appraisers search public records for home descriptions, sales data, and other available information about a property. This data is used to formulate the value of the subject property. If the home across the street recently sold for $600,000, does not contain a finished basement, but is identical to the subject home in every other way, the subject property may be valued at $620,000. Comparable homes sold in the most recent 90 days are hugely important in the Sales Comparison approach. Homes sold over 6 months are mostly irrelevant.