“An appraisal is a valuation of property, such as real estate, a business, collectible, or an antique, by the estimate of an authorized person. The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals are typically used for insurance and taxation purposes or to determine a possible selling price for an item or property.” Investopedia
Definition: appraisal In Real estate is estimating a home’s current market value. It is also an essential tool that provides a real estate negotiation base.
Appraisal definition
When An Appraisal is Needed
Appraisals may be utilized for many reasons based on unique circumstances. An appraisal process is required to establish a house’s fair price according to market conditions.
Circumstances that may need an appraisal definition include:
- To facilitate a home sale, both the buyer and the seller need to understand the house’s estimated value to help negotiate a clearing price.
- To secure financing – Particularly credit. Banks and lenders generally lend some loan-to-value (LTV) against properties, requiring an estimate of value before extending credit.
- To take out a home insurance policy – Insurance companies cannot assign a policy value to a house without understanding its worth or what it would cost to replace it.
- For will and estate planning – Families, lawyers, and wealth advisors may wish to better understand what properties are worth to support the division of those assets among beneficiaries.
- “Disputes” – It’s common when several persons have a common interest in a house. An independent home appraisal may be required to facilitate a buy-out. Divorce and/or separation is a justification for seeking a home appraisal, including business. Or other values the couple may have.
- For tax purposes – An example is if a home is being donated to a non-profit organization; the “value” of that property could be tax deductible for the donor, but a fair estimate is required. In the US, the Internal Revenue Service (IRS) requires a Qualified Appraisal, which is higher than most other appraisal circumstances.
How Does An Appraisal Process Work?
If you haven’t been active in the real estate market in the past few years — buying or selling a home — the term appraisal would mean nothing to you. But it’s important to understand what and how appraisals work because nowadays, the appraisal can be a potential deal-killer when you’re trying to sell, buy, or refinance.
Imagine that you’ve found a home you love. You and the seller have come to terms on a fair market value. You’ve inspected the property and reviewed all of the seller’s disclosures. You’ve also submitted every last piece of financial data to your mortgage broker, and you’re already picking out new paint colors because you think it’s a done deal.
Then, You get a call from your mortgage broker saying the property didn’t appraise at or near the fair market value. This turn of events could prevent a first-time buyer from finishing the buying process, but it is just part of the process for a more experienced buyer or seller.
Let’s take a look at the appraisal process. From your first call to the appraiser to your final valuation, here is a step-by-step guide to how a home appraisal works:
First Step: Documentation
Share any documentation you have asked for. Don’t try to fool banks, appraisal officers, or buyers into valuing your property higher than it’s worth. Real estate experts know all the tricks in the book. Appraisers are mainly bound by their integrity to perform accurate valuations. They know they might be summoned to court if there’s ever a property dispute, so they make sure they set a number they can back up with proof.
Gather any documentation related to income statements, property taxes, renovations, etc. Don’t withhold anything! Simply be upfront about the property’s history and let your appraiser do their job. If you don’t have a required document, let them know. It happens frequently, and your appraiser can recommend ways to solve the problem.
Second Step: Site Visit
People imagine a site visit that includes an in-person inspection of the property. This is an important part of the valuation process. Depending on the size and specifics of the house, your appraiser may bring a team. It may take as little as one hour or longer. They may use a smartphone or tablet with software to collect and organize their findings.
They will look to verify the information in your documentation. They will also are trained to detect problem areas and positive ones that could alter the final valuation of the house. They will examine the structure first and then move into other areas of the property.
Third Step: Research & Analysis
This step refers to the research and analysis portion of your valuation process. Your appraiser needs to review city and county records and neighborhood demographics to assess the value of your property. They need to ensure that there are no zoning restrictions or violations. It is also important to find out the valuation history in your neighborhood.
The on-site inspection portion of a home appraisal usually takes 1-3 hours. Some appraisal inspections take less than an hour. It can take up to a week or two to complete and deliver the final appraisal report.
Final Step: Valuation
Finally, you’ll receive the valuation report. Your valuation will consider how much your property is worth or could generate if you rent it. If the appraiser has used the cost approach, the value will be the amount it would cost to build a replica of your property; this is typically used to evaluate newer properties. Another common assessment approach is income capitalization, primarily used to assess income-generating properties.
Now that you have an official valuation. You are now in a solid position to negotiate a sale of your property.
What Areas of Your House Appraisers Focus on?
Home’s Exteriors
At its most basic, a home comprises a foundation, walls, and a roof. All three play significant roles in the functionality, and an appraiser will pay serious attention to them.
The appraiser will look for defects in the home’s general construction and damages to its components.
A problem with a roof or a foundation can quickly make a home inhabitable, so be aware that the home appraiser will focus intensely on these. The home appraiser will report to the lender, who will provide the buyer with a mortgage.
The home appraisal’s purpose is to ensure the house value is equivalent to the mortgage loan.
The Size of the Property
The size of your lot and the constructed area of your house are important considerations for the appraiser. They are significant factors that determine an appraised value. People prefer larger homes and larger lots, so you can expect these to come into play when your house is evaluated.
For example, a one-acre lot with great landscaping might be worth more than a 2-acre lot where wetlands occupy ninety percent of it. A home appraiser needs to make this comparison in judgment when evaluating one property to the next.
The home’s square footage makes up a large part of the calculation of the appraised value. Typically, the more bedrooms and bathrooms you have, the more you can expect the house to be worth. The house appraiser will pay special attention to these factors.
The Interior of A House is A Factor in the Evaluation
A significant part of what an appraiser looks for in a home is the interior condition and amenities. Windows and doors, flooring, walls, plumbing, electrical, kitchen, and bathroom are essential parts of an appraisal process. Even if the roof, siding, and foundation are all in excellent shape, the interior of your home is just as crucial to the home appraiser when assessing value.
An experienced appraiser knows all these and can tell good from the bad. This is true even with your home’s appliances and the installed light fixtures.
Home Improvements Are Key Elements in Appraisals
The value of a home does not stop at its original construction. The house appraiser will be very interested in any improvements you have made and the quality of those improvements. To determine overall value, the appraiser considers a new floor, a renovated bathroom or kitchen, new appliances, or an HVAC system.
Buyers and lenders love newer appliances and quality renovations because they contribute to the property’s lasting value. A new dishwasher and kitchen renovation may add another 20 years to a kitchen’s life, which is good for everyone involved.
Home improvements will undoubtedly be a factor in how an appraiser determines the value of a home.
Extras and Additions Factor Into House Appraisals
The extra things that make your home special will also be appraised. A home may be very basic or have some additions that make it more appealing.
For instance, air conditioning in a colder climate might be unusual for the area but fantastic for the homeowner during the few hot summer months. A swimming pool is another example. A swimming pool is good in places where people are willing to pay for it. It adds value to your home.
Even things you might consider basic, like insulated windows, fireplaces, a garage, or a security system, are critical elements of what appraisers look for during the home appraisal process.
Understanding Appraisals
A certified appraiser will visit the property, measure it, and note its features and condition. The appraiser compares it to other recently sold properties and adjusts the value for the size, age, condition, and parts differences. Lenders use their professional appraiser’s opinion to determine that there is enough value in the home to justify the sales price and the mortgage amount.
What happens if the appraisal comes in less than the sales price? Several options are available.
- The seller may agree to lower the sales price to the appraised value.
- You may take the home at the agreed-upon original sales price and increase your down payment to cover the difference.
- You or the seller may contest the appraisal. Your agent can provide newer or comparable sales information and ask the appraiser to reconsider the previously stated value.
Definition
An appraisal is an independent assessment of the value of the property. The appraisal report gives you helpful information about the property. It describes what makes it valuable and may show how it compares to other properties in the neighborhood.
When you borrow money to buy or refinance a home, your lender may need a new appraisal and may require you to pay for it. Your lender may also use other ways to check the home’s value. For a typical home loan (a loan secured by a first mortgage on your residential real estate), you are entitled to receive a copy of appraisals and opinions of the value your lender gets. You should receive them soon after they are delivered to the lender in complete form—no later than three days before closing.
You can be charged a reasonable fee for the lender’s cost of preparing the appraisal or other valuation. However, if you want to sell your house or refinance, hire a professional appraiser with a good negotiation base.
Most appraisal reports usually include the following key sections:
- Cover Page – Introduces the appraiser’s name or company. The dates the inspection was completed.
- Letter of Transmittal – This section includes who commissioned the appraisal, its intended purpose, and its legal use.
- Executive Summary – This section typically highlights a few key findings in a short, single-page format; this may include an estimate of value, albeit without much information on the methods used to arrive at the estimate, as well as a brief description of the property.
- Property Description – This section includes all legal identifiers. It also features an analysis, including notes around quality, remaining useful life, specific deficiencies or repairs, and a recent sales history.
- Property Valuation – This section extends information about the different valuation approaches employed and any comparable properties used to support the analysis.
- Certificate of the Appraiser – This section highlights the appraiser’s qualifications.
- Appendices – It’s common for an appraisal report to have dozens of pages of “addenda” or “appendices.” These have all kinds of supporting documentation like maps, financial statements, information about calculations that were made, and many other types of relevant information that don’t fit elsewhere in the report.
An appraisal definition is a report that applies one or more methods to determine a property’s commercial value. It is a crucial element in closing a real estate negotiation.
Typically, the appraisal service is paid by lenders, but sellers should hire their own appraiser to have an adequate base to negotiate. The appraiser considers the house structure, foundation, roof, frame, walls, electrical features, size, garden, home improvements, etc. An appraisal home visit may take from one to three hours.
If you need or want to sell your home, do your best to find your house’s commercial value. Contact a real estate agent or an investor who offers to buy your property at the best possible price. Real estate investors pay cash for properties. Usually, sellers do not pay agent commissions, closing costs, and other expenses. Investors can purchase your house in about seven days.