Appraisals and Appraised Value

An “appraisal” is a comprehensive report that determines the value of your property based on a number of valuation factors, ranging from gross living space, to the view and the year a property was built.

If you plan on purchasing a new home or refinancing your current loan, you will need to order an appraisal. Usually a bank or mortgage broker will handle this for you, but you will still have to foot the bill unless it’s built into your mortgage rate.

Appraisal Costs

Appraisals typically cost anywhere from $250 to $500. The cost will vary based on property type, location, and square footage. Multi-unit properties and properties in rural areas will usually cost more to be appraised than a single-family residence in a densely populated area.

The most common type of appraisal is the Uniform Residential Appraisal Report, or URAR. It consists of interior and exterior photos, comparison sales, and a complete cost breakdown of the property. This type of appraisal is a blend of both a market and cost approach.

How Is My Home Appraised?

The cost approach establishes value by determining what the cost would be to rebuild the structure from the ground up. The value approach determines value using comparison sales in the immediate area that have sold within a recent period of time.

The comparison sales are broken down in the appraisal report as well, and compared to the subject property. Each comparison sale is given or deducted value in a number of categories based on how it stacks up against the subject property. The net value of the comparison sales are then averaged to come up with a median appraised value for the subject property.

The value of the subject property is really the most important factor when it comes to securing financing. Banks and mortgage lenders need to ensure your property is in good condition, and truly worth what you or your broker say it’s worth. Any possible valuation inconsistencies will likely cause investors to shy away from purchasing the mortgage, leaving the bank or lender with a vacant property and a major loss. Even Donald Trump could buy a shack and fail to obtain a mortgage because the property itself simply isn’t marketable.

Appraisal Review

Once an appraisal is ordered, most banks and lenders will order a review of the appraisal. The review will be conducted by another appraiser or simply by use of an AVM, or Automated valuation model. This is where many borrowers get into trouble. If the review comes in low, or if the property is deemed incomplete, hazardous, or unique in anyway, a bank may decline the loan and deny financing to the potential borrower. Even if the borrower has outstanding credit and assets galore, a faulty, unique, or overvalued property can kill the deal.

That’s why it’s always important to use a qualified appraiser who assigns a realistic value to your home so there aren’t any surprises when it’s do-or-die time. It’s better to know the true value of your home upfront before you sign any contingencies or purchase contracts. And remember that the quality of your appraisal will determine the quality of your review (unless it’s automated).

The review appraiser will always find the value based on what’s given to them. If they receive a poor appraisal report, they will likely assign a poor value. I’ve seen brokers submit multiple appraisals and receive completely different values based solely on the original appraisal itself.

Although an appraisal is irreplaceable, you can do some quick research on your own by using a free internet house values tool that generates a quasi-property appraisal in a matter of seconds by simply typing in the home address.

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2 Comments

  1. John Gonzalez November 10, 2014 at 3:20 pm -

    I have a home I am trying to keep after my divorce. My wife does not want to be part owner and so I have to buy her out. I am a retired vet so my home is under a VA loan. The only way for me to keep the home is by buying her equity out, but I was wondering what kind of appraisal should I use to convince her and her lawyer that I am being fair. After I find out the fair market value I would need to figure out how much I need to pay her and then apply for a loan. So that I can give her payment in one lump sum. Problem is I am not sure if I can afford another loan. The other option is to sell and not make enough equity to find another decent place to live.

  2. Colin Robertson November 10, 2014 at 4:31 pm -

    John,

    You may want to speak with some VA lenders to see if you qualify for a loan with the necessary amount of cash out to pay off your wife. Assuming you can get a loan, they’ll order an appraisal to determine the value of your property.

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