Sellers are obviously interested in knowing the value of their homes so they can figure out roughly how much they can potentially sell for. But buyers also want to know the value of homes they’re interested in and may put an offer on, as it will help them determine an appropriate and competitive offer.
Even homeowners who have no intention of selling may want to know how much their home is worth if they plan to refinance their mortgage.
In any case, having the home appraised by a professional is usually the best way to get the most accurate assessment of how much a property is worth according to current market conditions.
While homeowners can always hire an appraiser to assess their property’s value, appraisers usually work for lenders when a buyer applies for a mortgage.
Before final approval can take place, lenders typically send out an appraiser to find out whether the agreed-upon purchase price is an accurate reflection of the current market. This will help lenders determine an appropriate loan amount to approve a buyer for.
The question is, what exactly goes into an appraisal? How do appraisals come up with an accurate value of a particular piece of property?
The Standard Uniform Residential Appraisal Report
In order to take out as much subjectivity in the appraisal of a property, appraisers use what’s known as a Uniform Residential Appraisal Report (URAR), which is a standard report used to determine the overall value of a home. Appraisers must go through all the sections of the report to come up with a final value.
This form ensures that all appraisal reporting and analysis is standard across the board, regardless of the person doing the appraising.
Here are some of the major factors that appraisers look at when coming up with the value of a home.
Location always plays a role in property values. The same home and lot in one location can be worth a lot more than the exact same property in another. As such, the exact zip code and neighborhood will be looked at.
Further, the exact location of the lot in the neighborhood will also be factored in. For example, a pie-shaped lot on a cul de sac will be worth more than a lot abutting the main road, even if they are within the same block.
The size of the property that the home sits on will be assessed. Generally speaking, larger lots are valued higher than smaller lots in the same neighborhood, though other factors will also have to be taken into consideration, such as slope or vegetation.
Not only is the size of the lot important, but so is the size of the home. The exact square footage of the subject property will be factored into the calculations to determine the overall value of the home.
The condition and style of the home’s exterior will be looked at. This includes the foundation, roof, and exterior walls to see what condition they’re in.
Once the outside of the home has been looked at, the appraiser will scope out the interior of the home in great detail. Things such as the doors, windows, floors, ceilings, walls, plumbing system, electrical system, kitchen, and bathroom are all crucial components of a home and the state that they’re in plays a key role in the appraiser’s assessment of the property’s overall value.
If any improvements to the home have been made, this will be considered. Many improvements increase the value of the home if they are done properly and use quality materials and finishes. New flooring, granite counters, appliances, windows, or HVAC system are all great examples of improvements that can boost the value of a home.
But some improvements can actually compromise the look and functionality of a home, and the appraiser will take that into consideration when determining its value.
The functionality and flow of a home are determined by its floor plan. For instance, an open floor plan might be valued higher than a choppy layout that doesn’t make much sense. The appraiser will factor in the layout of the home and jot that down in the URAR form.
Number of Bedrooms and Bathrooms
A home with 4 bedrooms and 3 bathrooms, for instance, will likely be assigned a higher value than a home with 2 bedrooms and 1 bathroom in the same neighborhood, generally speaking.
The types of amenities that make a home more comfortable and enjoyable will be accounted for. For instance, a pool, hot tub, master ensuite bathroom, finished basement, and heated flooring are all examples of amenities that can add extra value. The appraiser will make note of such amenities.
Of course, the current market will play a key role in the value of a property. What a home may be worth today will be different than what it may have been worth only 6 months ago.
Methods of Assessing Value
On the URAR form, appraisers have three different ways to actually come up with the value of a home: the sales comparison approach, cost approach, and income approach.
Sales comparison approach – This is perhaps the most common way to come up with property values for residential properties. It basically involves comparing the subject property to other similar homes in the area that have recently sold. Ideally, the features of comparable homes should be as close in similarity to those of the subject property.
Cost approach – This approach factors in the cost of the land and construction of the home, minus any depreciation.
Income approach – This appraisal method involves estimating property value by dividing the net operating income of any rent collected by the capitalization rate. This is more suited for investment properties and not for owner-occupied residential homes.
The Bottom Line
No matter what side of the coin you happen to be on, knowing the value of a home is helpful. Sellers will want to know what they can list at, and buyers will want to make sure their offer price is fair. Homeowners may even want to know how much they can refinance at. Regardless, the job of an appraiser is an important one, and it helps to understand how they come up with their values.