You’ve been pre-approved for home financing, found a home and settled on a purchase agreement; now what? Whether you’re buying a home or refinancing your mortgage, the value of the property in question needs to be determined through a home appraisal. So how do appraisers attach value? Here are few first-time homebuyer FAQ’s about home appraisals and the answers.
Why Do I Need an Appraisal?
Simply put, an appraisal is meant to protect you as a borrower and your lender from purchasing an overpriced home. If you settled on a purchase price of $250,000 but the value of the home is much less, you (or your lender) wouldn’t want to be stuck with a property worth less than your investment.
What Does an Appraiser Look For?
An appraiser gains their knowledge of the property during a walk-through, in which they make notations and take photos and measurements of the property. Appraisal reports are very detailed and include some of the following factors for value determination:
- Exterior and interior condition
- Home functionality
- Home improvements
- Age of condition or the home’s systems
- Exterior features and amenities (i.e. garage, deck, etc.)
- Physical, functional and external issues that impact value. For example, a physical issue would be a leaky roof, a functional issue would be an insufficient bathroom-to-bedroom ratio, and an external issue would be a home located near a sound obstruction like an airport or highway.
The appraiser may also ask the current homeowner for information about the property that may affect valuation, such as invoices of recent remodeling projects or upgrades, surveys, blueprints, etc.
How Is Value Determined?
To determine a property’s market value, an appraiser will present their unbiased opinion and analysis in a detailed appraisal report. To get there an appraiser typically uses the following for primary residence appraisals:
- Cost Approach. This involves calculating the current cost of reproducing or replacing a home, minus physical depreciation, plus the value of the land.
- Comparison Approach. This involves making comparisons to other similar, nearby properties (also called “comps).
For homebuyers, appraisals put logic into the sometimes-emotional process of homebuying. To learn more about the process of buying your first home, download our free Mortgage 101 Handbook, an all-inclusive guide for the first-time homebuyer.