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Understanding Real Estate Appraisals

July 11th, 2012

When you buy a home, or use your home or other real estate as collateral for a loan, your lender will require an appraisal. An appraisal helps to determine the property’s market value or how much it’s worth – and how much money the lender will give you to buy or borrow against the property. The appraisal protects the lender since it wants to make sure the property is worth the amount it’s investing in your loan.

When you apply for a mortgage or a loan, the lender will contact an appraiser, a certified, state-licensed professional who’s trained to determine the value of real estate property. The lender may use its own appraiser or contract with independent appraiser. It’s best if the appraiser is an objective third party and not connected with anyone involved in the transaction.

Even though the lender requires an appraisal, it’s still your responsibility to pay for it. An appraisal can run about $300 or more depending on the price of the property.

There are two primary methods for appraising residential property.

  1. Sales Comparison Approach – The appraiser compares the property to similar homes that have sold in the area, ideally within the last six months, called comparables or comps. Often the appraiser will look at a comp below the value of the subject home, similar to the value of the subject home, and above the value of the subject home. Sometimes the appraiser may need to look at more than three comps to make a determination. The appraiser compares each comp’s features (e.g., lot size, square footage of the finished and unfinished space, the home’s age and style, and other items like garages and fireplaces) against the subject home. The appraiser then makes adjustments on each comp based upon the subject home to make his final determination.
  2. Cost Approach – The appraiser estimates how much it would cost to replace the subject home if it were destroyed. This approach is generally used for new homes where the costs to build are known. The appraiser also considers the value of the land and depreciation to determine the subject home’s value.

The appraiser prepares a report that includes information such as the details about the subject home and the comps; the overall real estate market in the area; health and safety items affecting the home’s value; and the area in which the home is located.

Once the lender receives the report, it will study the appraisal carefully before making a determination regarding your loan. The loan may be declined if the property appraises at an amount lower than the sales price. However, most lenders have a process for disputing an appraisal.

Note: An appraisal is not the same thing as a home inspection. While appraisers do look at health or safety issues concerning the home, such as cracked foundations or exposed wiring, home inspectors actually test the home’s mechanical systems and make recommendations about needed repairs. Also, an appraisal is not the same thing as an assessment. Assessments are done by a city or county to determine property taxes.

Do you still have questions about home appraisals? Contact Grandview Lending. We’re a trusted mortgage broker who can help you determine the best mortgage or loan solutions for your needs. Call us today.

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