How the Appraisal Works in the Home Buying/Selling Process

Are you thinking about buying or selling a home? Are you in the process of buying or selling? This is written for those who are buying or selling a home and want to know the role of the appraisal in the home buying process. Unless someone is able to pay cash for their home most home purchases involve a loan from a lending institution. Lenders require an appraisal of the property. Here are some things to understand about the appraisal:

1. What is an Appraisal?

The Appraisal Institute defines an appraisal as:

An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. . Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and farms. (here is the link)

The appraiser will have a license to perform appraisals in the state the property is located. The appraiser will inspect the property and research the market. The appraiser will find sales in the neighborhood that are similar to the property being appraised. These sales are called comparable sales. These sales will be adjusted for differences and are used in determining a market value opinion of the property being appraised. It is the appraiser's role to provide an unbiased opinion of value and to protect the lender from having collateral that is worth less than the loan and to protect buyers from overpaying for property.

Here is a sample from a report which show the property being appraised (referred to as the subject) and three comparable sales within the neighborhood. You can see where there have been adjustments made to the comparables for financing; bedroom counts, bathroom counts,gla (living area), and fireplace. Appraisers have been trained in ways to determine the adjustments. For an example of how adjustments are determined you can look here. You can see that after the adjustments were made the prices range from $260,060 to $271,270. The appraiser will give a value of opinion value between these two values and sometimes will place more weight on one sale based in its similarities to the subject. For this property the appraised value was determined to be $265,000.

2. The Appraisal Inspection:

The appraiser will contact the home owner to schedule an inspection of the property. The appraiser will measure the exterior of the home and take pictures of the all of the rooms inside the home. The appraiser will also look at the attic and crawl space if present. Some appraisers use a tape measure or a laser measure. We actually use both forms in our practice. It is a good idea to give the appraiser a list of recent updates that have been done to the home or information that would help the appraiser in developing the opinion of value. For more information about what to expect in the inspection you can check out this blog post about what to expect in the appraisal inspection.

Laser Measure

Tape Measure