What is an appraisal and who completes it?

An appraisal is required when you purchase a home or refinance your current home. It’s an inspection of the property to help the bank determine how much money they can lend you. An appraiser will visit the property to inspect it, measuring the square footage, condition, and features of the home. The appraiser also compares the property to others that are similar in the neighborhood that have recently sold.

There are Standards

National standards have been established that govern the format of the appraisal; they also specify the appraiser’s qualifications and credentials. Most states now have licensing requirements for appraisers who evaluate properties located within their states.

The appraiser will create a written report for 1st Source Bank, and you’ll be given a copy once it is completed.

More Details

Usually, the appraiser will inspect both the interior and exterior of the home. However, in some cases, only an exterior inspection or no visit (desktop) is necessary. That decision is made based on your overall loan profile and the location of the home. Your originator will contact you to determine if you are eligible for an exterior or desktop appraisal. You can always choose a full appraisal.

After the appraiser inspects the property, he or she will compare the qualities of your home with other homes that have sold recently in the neighborhood. These homes are called “comparables” and are an important part of the appraisal process. Using industry guidelines, the appraiser will evaluate the major components of the recently sold homes (i.e., design, square footage, number of rooms, lot size, age, etc.) to the components of your home. The appraiser uses those comparisons to determine an estimated value of your home.

As an additional check on the value of the property, the appraiser also estimates the replacement cost for the property. That is determined by valuing an empty lot in the neighborhood and estimating the cost to build a house of similar size and construction. Finally, the appraiser reduces this cost by an age factor to compensate for depreciation and deterioration.

If your property is for investment purposes, or is a multi-unit home, the appraiser will also consider the rental income that could be generated by the property to help determine the value.

Using these different methods, an appraiser will frequently come up with slightly different values for the property. He or she will use their experience and judgment to reconcile the differences and assign a final appraised value. The comparable sales approach is the most important method for determining the value of a property because a home is only worth what a buyer is willing to pay, and a seller is willing to accept.

Bottom Line

It’s not uncommon for the appraised value of a property to be the same as the amount stated on your sales contract. This is not a coincidence, nor does it question the competence of the appraiser. Your purchase contract is the most valid sales transaction there is. It represents what a buyer is willing to pay and what the seller was willing to accept. Only when the comparable sales differ greatly from your sales contract will the appraised value be very different.

© Fintactix, LLC 2022