What is a Home Appraisal?

One of the many documents necessary in a real estate transaction is a home appraisal — a written statement of the value of a home. The value is derived by calculating several different factors and analyzing market conditions in the area. While buyers and sellers may undervalue the home appraisal, it remains an important part of any real estate sale.

A home appraisal must be performed by a licensed appraiser who is knowledgeable in estimating the current home value. During the process, the appraiser will visit the site and take pictures both inside and outside. Measurements will also be taken. An examination of the property is made in order to identify any defects or upgrades to the property. This is necessary in order to place a fair and justifiable value on a home.

Cost approach is one way of placing a value on a home and is usually used for insurance purposes. It involves using the current rate of building the home per square foot in a particular area. The cost of upgrades or repairs are included in the cost approach in order to reflect a true replaceable value. The dollar amount calculated by the cost approach, however, does not always equal the market value on an appraisal.

The market approach calculates the value of a home by researching the current market trend in a given area. The home being appraised is compared to other similar homes within the same area that were recently sold. The square footage and amenities of each home must be similar. There must be three comparables for the average home with additional comparables for larger and more expensive homes on the final appraisal.

When conducting the home appraisal, the appraiser will note any deficiencies or upgrades and compute them into the final value. Depending on the deficiency, repairs and maintenance may need to be performed before any transaction can take place. If that is the case, a final inspection will have to be performed and documented.

Having a home appraisal completed is an important part of any real estate transaction and can be the document that makes or break the deal. Lenders use the appraisal to determine the mortgage loan amount and the homeowner’s insurance that will be required to satisfy the mortgage. Insurance companies will use a home appraisal to determine the amount of coverage for the home.

It is important to prepare the house before having a home appraisal. This will result in the best possible market and cost values being attributed to the home.