Home Matters With Sarah: The Appraisal

Home Matters
Mortgage Loan Specialist
How exciting, you have put an offer on the house you want to buy and it has been accepted! Now the process of inspections begins.
The inspection will help you determine if the house you intend to purchase is a sound investment. One of the most important inspections is the property appraisal. What is a property appraisal and why do I need one?
A real estate property appraisal is an estimation of market value of the house done by a licensed and experienced individual who is trained to evaluate and compare the features the house.
The purpose of an appraisal is to compare the house you intend to buy to other similar houses that have recently sold in the same area. The comparison of similar houses allows the appraiser to develop an estimated market value based on data taken from closed sales. The appraiser can use several different
techniques to develop an opinion of value but the most commonly used technique for a home purchase is the market comparison.
What is “market value”? Market value is the highest price a buyer would be willing to pay and a seller would accept in an exposed market where both the buyer and seller are fully informed about the property. Market value is heavily influenced by the sale of similar homes in recent months.
When an appraiser starts the process of developing a market value, he or she will begin by researching the property in the public property tax records and any other public records on file. The next step is to inspect the house to determine the age, condition and features of the property. The appraiser will spend 15-30 minutes walking through the house and taking notes and photos. The appraiser will note the number of bedrooms, bathrooms, and the type of heating and cooling and other amenities like fireplaces or woodstoves.
The appraiser will also note the total heated square footage of the house. (It is important to know that areas of the house that are below grade, or below the ground level, are valued differently than areas that are above grade.)
After the appraiser has completed the inspection, taken notes and pictures, he or she will begin looking for houses similar in size, style and room count that may have sold in recent months. Typically the appraiser looks for sales in the previous 6 months. After the appraiser has found similar homes, the information about the home that was sold and the home being appraised will be compared in a side by side comparison.
It is very rare that there will be two properties that are exactly alike, this is why the appraiser looks for similar properties. The appraiser then begins to note differences in the properties being compared; differences could include minor differences in total square footage, bedroom and bathroom count, heating or cooling sources and overall condition of the home.
An example of a side by side comparison would look like this:
  • Subject Home: 1,200 Square Feet. – 2 Bedrooms – 2 Bathrooms – Forced Air Heat – No Cooling – Age: 35 years – Condition: Good
  • Home #1: 1,150 Square Feet – 2 Bedrooms – 1.5 Bathrooms – Radiant Heat – Central A/C – Age: 30 years – Condition: Good
  • Home #2: 1,225 Square Feet – 3 Bedrooms – 1.5 Bathrooms – Radiant Heat – Evaporative Cooling – Age: 40 years – Condition: Fair
  • Home #3: 1,800 Square Feet – 4 Bedrooms – 2 Bathrooms – Forced Air Heat – No Cooling – Age: 35 years – Condition: Good
As you can see, none of the homes are exactly the same but they are very similar. The appraiser will now begin to add and subtract value from the sold homes to arrive at an estimated market value of the subject home.
If the sold home has less than the subject home, the subject will be added a value for having more, if the sold home has more than the subject home, the subject will be deducted value for the difference. (Add value to subject for having 2 bathrooms but deduct value for subject not having cooling.) If the sold home and subject home are the same, no value adjustments are made.
After the appraiser has completed the comparison and adjustments, the average of the sale prices of the sold homes and the adjustments are factored together to arrive at a range of estimated market values. This range represents the high and low end of the estimated market value. The middle of the range is typically assigned as the estimate of market value.
The appraiser completes the appraisal report by providing additional information about the neighborhood, county zoning, trends in housing in the neighborhood and other observations noted during inspection. The appraiser will also note the presence or lack of any additional features like landscaping, storage sheds, car storage and anything else that might be unique to the property.
The final appraisal report not only provides an estimated market value but also paints a detailed picture of the home you are buying and how that home compares to other homes in the area.
The final report provides valuable information to you, the buyer and to your mortgage lender. The final estimated market value of the home will be used by your mortgage lender to determine the maximum amount that can be loaned to you to purchase the property.
Congratulations, you’ve complete all the necessary inspections and the appraisal, what happens next?
Sarah Hosford-Campbell is a mortgage loan office with Envoy Mortgage. Feel free to contact Sarah to suggest home ownership topics or for assistance with your home financing needs. Sarah can be reached at scampbell@envoymortgage.com

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