When it comes to figuring out how much a piece of real estate is worth, an appraisal is the most effective way to determine value. If you are confused about how home appraisals work, you are definitely not alone. There are several misconceptions about this industry that make it seem complicated to the average person. Once you understand how this process works, you’ll see exactly how mortgage lenders come up with the numbers they use for your home loan.

Home Appraisals 101

The basic purpose of a home appraisal is to come up with an accurate market value for a home. Typically, a mortgage lender is the one to hire a real estate appraiser. A mortgage lender needs to know an accurate value for a house before it can provide a loan for the home.

The real estate appraiser goes to the property, evaluates it and then creates a report that the mortgage lender or homeowner can review. In the report, it provides details about the property and the value of the house.

Appraisal Methods

When it comes to determining the value of a piece of property, there are a few different methods that the appraiser can use. One of the most common methods that an appraiser will use to determine the value of a piece of property is the sales comparison approach. With this method, the real estate appraiser compares the house to other homes that have recently sold in the area. The appraiser adds to or subtracts value to the subject property based on the features that it has compared to other houses.

Another method that appraiser can use is the cost approach. With this option, the real estate appraiser figures out how much it would cost to build the property in today’s costs. Then an amount for depreciation or appreciation is applied to that price.

The third method that a real estate appraiser can use is the income approach. This method determines how much a house is worth based on how much income it could bring in. The monthly income is then multiplied by a discount rate to determine how much the house is worth.

Considerations

Appraisal is not an exact science. Two different appraisers could come up with two different values for a piece of real estate. Because of this, property values can vary significantly from one case to the next. It is still the best way to determine the most accurate value of a property.

Visit Paramount Equity® and talk to a Financial Specialist