Appraisal Basics

Real estate is appraised to determine how much a specific property is worth. It is a crucial element of the home loan process, because it determines the total value of the property and can set the baseline for the terms of the down payment and the home loan itself. Once the correct value has been assessed, the appraiser is able to turn over their information to both the buyer and the seller to start working out a price. When figuring out the price of the property the appraiser takes into account a number of different factors with the property such as the physical condition, particular amenities and the location of the property.

Appraisal Methods

There are commonly three different methods that are used to assess the value of home or a property. These 3 methods include the cost approach, the comparison approach and the income approach. Each of these methods has its advantages and disadvantages, but it is important to consider which method is being used to determine the value of your home.

The cost approach determines the cost of the home to make improvements to the property prior to the appraisal, subtracting out the factors including physical deterioration, economic downturns and any functional obsolescence that may be taking place. The ultimate value of the home is typically referred to as the land value of the home.

The comparison approach is different. With the comparison approach, the appraiser uses other factors such as similar size, quality of the area and the location of the home as the benchmarks to determine the price of the home. The home or property is then compared to the benchmarks and is assigned a price based on that.

Finally, the income approach is used mostly to determine the value of commercial properties or investment properties. This methodology uses an objective estimate that a potential investor might be willing to pay to purchase the property. This is based off of net income that the property has the potential to produce.