Why get an appraisal?
An appraisal of your home is most commonly requested by a lender for mortgage purposes. Banks, credit unions, and trust companies all use the services of an accredited appraiser to give them an opinion of the value of a property that is being used to secure a loan. A lender wants to be sure that the amount she is lending, is less than the value of the home. If your bank is getting an appraiser to look at your home, it doesn't mean you are in some kind of trouble. It means that the lender's policies require an appraisal of the home on file with the mortgage.
Homeowners considering selling their home will often have a professional appraisal done to see what the likely sale price is, before deciding on a listing price with their realtor.
Appraisals are frequently ordered by tax and accounting professionals, often to determine the value of a given property at a specific date in the past. This takes the guesswork out of estimating these values, usually for the purposes of capital gains taxation.
In the case of a divorce, or a division of assets among multiple owners, an appraisal of the property is used to determine a buyout amount, or determine what the property was worth at a significant date in the past.
The opinion of an appraiser is valued because the appraiser is an educated, experienced professional who is in the position of providing an opinion of value from the perspective of an uninvolved, disinterested third party.
What does an Appraiser look for?
When the appraiser, or appraiser's technician, visits your home, he/she is looking at all of the aspects of the property as a whole that give it value in the local marketplace. This includes the site size, how that site is or can be used, and the home itself. The home is assessed for its size, condition, number of rooms, quality of finishing, overall layout and design.
- An appraiser is not interested in: how tidy your house is at the moment, your decorations, anything that would not be considered a 'fixture', and anything else of a personal nature.
The appraiser will need to walk through the home, take pictures, and take notes to help in the deskwork that comes after the inspection of the property. The appraiser will also take measurements around the exterior of the home, and may need to take interior measurements depending on the scope of work required by the client.
An important note regarding pictures taken inside your home: The pictures are intended to provide the client and/or intended user of the appraisal report with information on the interior condition and layout of the rooms. The information collected will be used to create the appraisal report for its intended purpose, and will not be used for any other purpose, disclosed to a third party or used by the appraiser for profit.
Our goal is to make the visit to your property a comfortable and easy one. The typical amount of time needed for the appraiser or technician to complete the visit is approximately 30 minutes.
What comes next?
The appraiser will complete a form or narrative appraisal that describes to the reader the process followed by the appraiser to conclude a final value. This includes a description that identifies the property being appraised, comments describing the size and condition of the home, description of the neighbourhood, and description of the site, or land. This description is supported by including several relevant photos from the appraiser's visit.
The value of the home is found using one, or a combination of, three different methods, or approaches, to determining value. These three approaches are the direct comparison approach, the cost approach, and the income approach.
- The most reliable approach in the valuing of single family properties is the direct comparison approach (DCA). This approach is based on the principle of substitution, meaning that a reasonable, knowledgeable buyer won't pay more for a given property then what he could pay for a similar substitute property. For example, if two identical homes are listed for sale at two different prices, the home with the lower list price, or the lower agreed offer amount, will sell first ( all else being equal). This sale price then sets the value of the other home, from an appraisal perspective. The appraiser will research the local market for recent sales of homes that are the most similar your home, the subject property. We all know that no two homes are identical, so this is where the appraiser needs to carefully consider the more significant differences between homes that have recently sold, and the subject property. Differences to consider include (but aren't limited to) location, site influences (such as noisy roads, or peaceful greenspace), site size, style of the home, size of the home, age and condition of the home, number of rooms, basement size and finish quality, and garage size.
- The cost approach is also often used hand-in-hand with the DCA. This approach combines the value of the land with the value of the house, to arrive at an overall cost. In this step, the appraiser will make use of construction cost tables, contractor estimates, and knowledge of building materials costs and local building practices.
- The Income Approach is relied on more when the value of the property is strongly influenced by its potential for providing rental or lease income to the owner of the property. This approach relies on local income multipliers to indicate the market value of an income-producing property such as a multi-family building, business, or lease space.