3 Methods Appraisers Use to Find Your Home's Value
Courtesy of: Anytime Presentations
An appraisal is frequently viewed as an inconvenience and a "nuisance" cost, but if you are buying, selling, or refinancing your home, an appraisal will likely be required. Here are three methods appraisers use to find your home's value.
1. Sales Comparison
To develop this analysis, the appraiser will research sales of other houses (known in the industry as "comparables") that have recently sold in the neighborhood. From these sales, the appraiser will find the sale price for your home. When properly developed, this analysis will take into account differences (such as age, condition, location and design features) between your home and the comparables. The sales comparison approach is used in virtually every house appraisal and is usually the most reliable indicator of market value for a single-family residence.
2. Cost Approach
In this analysis, the appraiser estimates the market value of your house by estimating how much it would cost to build a replacement―in other words, how much it would cost to buy a lot and build a similar house. The appraiser's calculations will take into account any depreciation associated with your house. If your house is 20 years old, it will be worth less than a brand new house of similar size with similar features in the same neighborhood. The cost approach is best suited for newer houses that have modern features and design and less reliable when estimating market value of an older house that may have significant depreciation or functional inadequacies.
3. Income Approach
In this analysis, the appraiser develops an opinion of market value by estimating how much income your house would generate if rented out at a typical "market rent." This income is then converted into an estimate of value based on the ratio between value and income. The appropriate ratio is derived from local market transactions. The income approach is most useful when the house being appraised is in a neighborhood where houses are frequently rented and where houses are acquired by investors.
The sales comparison approach is almost always used to appraise single-family homes and is usually the most reliable method. You can expect your appraiser to rely on this technique, which may be supplemented by the cost or income approach.