A real estate appraisal is an objective, professional assessment conducted by a licensed or certified appraiser to determine the fair market value of a property. This process is most commonly required by lenders during mortgage or refinance transactions to ensure the property serves as adequate collateral for the loan.
Key Steps in the Appraisal Process
- Ordering the Appraisal
- The lender typically orders the appraisal after a purchase agreement is signed or a refinance application is submitted.
- The buyer (or borrower in refinancing) pays for the appraisal, not the lender.
- Lenders may provide a list of approved appraisers to ensure independence and reliability.
- Property Inspection
- The appraiser schedules an inspection to visit the property, which usually takes between 20 minutes and a couple of hours, depending on the property’s size and complexity.
- During the inspection, the appraiser evaluates the interior and exterior, noting features such as layout, condition, amenities, and any needed repairs or deficiencies.
- The appraiser measures the property and may sketch a floor plan.
- Market Analysis and Comparable Sales
- The appraiser researches recent sales of similar properties (“comps”) in the area to compare features and prices.
- Factors like location, neighborhood, accessibility, school district, and market trends are considered.
- The appraiser analyzes public records, tax data, and local real estate agent information to gather relevant data.
- Valuation and Report Preparation
- The appraiser uses one or more valuation methods, commonly including the sales comparison approach, cost approach, and sometimes the income approach.
- The cost approach formula, for example, is:
“Cost of land”+”Cost of construction”-“Depreciation”=”Estimated value”
- The appraiser compiles all findings into a detailed report, which includes photographs, maps, property sketches, and an explanation of the valuation.
- The report is delivered to the lender, and the borrower is typically entitled to a copy.
What Appraisers Look For
- Property Characteristics: Size, age, condition, layout, amenities, and any deficiencies or needed repairs.
- Location: Neighborhood quality, crime rates, amenities, infrastructure, and accessibility.
- Market Conditions: Whether it’s a buyer’s or seller’s market, recent sales trends, and price ranges for comparable homes.
- Additional Factors: Proximity to transportation, school districts, hazards (like flood risks), and any special features or income potential (e.g., rental units).
Appraisal vs. Home Inspection
- Appraisal: Focuses on determining the property’s market value for the lender and is required for most real estate transactions.
- Home Inspection: Assesses the property’s condition and safety for the buyer’s benefit and is not required but highly recommended.
Outcome and Impact
- If the appraisal value matches or exceeds the sale price, the transaction can proceed smoothly.
- If the appraisal comes in lower than the sale price, it may require renegotiation, additional funds from the buyer, or could potentially derail the transaction.
In summary, a real estate appraisal is a critical step in most property transactions, providing an unbiased estimate of a property’s value based on its features, condition, location, and current market trends.