Thursday, February 25, 2021 / by Sam Gerardi
What Is a Home Appraisal Based on?
A home appraisal is a complex procedure for determining the value of a home, which is an important number for homeowners and potential buyers alike. Trained and certified appraisers look at several factors to determine a home's value, including its permanent fixtures and the land it sits on. As homes change hands and values change over time, there's always a need for new, accurate appraisals.
Many of a home's physical features help determine its value in an appraisal. Simple facts such as the age of the home, its square footage and the number of bedrooms or bathrooms can have a major impact on appraisal value. Homes that need significant improvements, such as a new roof, siding or driveway, will appraise for a lower value than those that don't need as much work. The quality of the construction and the value of fixtures, including floor coverings, plumbing and appliances such as the furnace, air conditioner and water heater, also play into an appraisal.
To an appraiser, a home's location may be as important as its physical characteristics. Most appraisals include a CMA, or comparative market analysis, which uses the sale price of similar nearby homes to help determine the fair market value of the home being appraised. Homes in more desirable neighborhoods--because of a better public school system, the perception of safety or the level of economic opportunity in the region--are likely to earn a higher appraisal than similar homes elsewhere. Other location features such as the views from a home and the degree of privacy from neighbors also play a role in the appraisal.
Housing markets are constantly changing as home values rise and fall. This happens because of the law of supply and demand as well as factors such as mortgage interest rates and the general condition of the economy. Appraisers factor economic conditions into their work. This means that a home with a low appraisal value may be a good investment opportunity if the appraisal is low as a result of the housing market and not because of any particular problems with the house itself.
Home appraisals have several different purposes. For homeowners looking to sell, they give an indication of what price the owner can expect to sell for, which may determine the entire marketing strategy for the owner and real estate agent. A buyer can use the appraised value of homes to compare the value of different neighborhoods and shop for a house only within a certain price range. Appraisals are also part of the home equity lending process, with lenders appraising homes to determine how much money the owner can borrow against the equity in the home.
Assessments are similar to appraisals but have a very different purpose. The process uses similar factors to determine a home's value. However, whereas an appraisal is performed by a private appraiser for commercial purposes, an assessment is done by an agent of a local government for tax purposes. State and local governments use assessments to levy property taxes based on the value of taxpayers' homes and real estate holdings.
...OK, a real world example in English please!
Consider a home with 2,000 square feet built 15 years ago, in an wide area of very similar homes in size and age. Average cost for these homes is $120/foot. Now consider that one home is updated recently and has many upgrades that make it outstanding compared to the other homes in that area. A kitchen update may cost $7,000, but this homeowner decided on a remodel that cost $25,000. Similarly they spent $12,000 on the master bath and $8,00 on hardwood floors. So we have ~45,000 spent on a home surrounded by homes with an average value of only $240,000. Does that make this home worth $285,000? More importantly, can an appraiser give this home a value far beyond the area's market value. In short, it would be very hard to get this appraisal through underwriting.
This scenario is rather common and the sellers wonder why they cant get much more than their neighbor. The key ingredient is "location" as it pertains to very similar homes. The key to building value in updates is to understand the value of the updates WHERE YOU LIVE. With the right current market information, you can determine what updates are appropriate for your home. Not unlike buying direct from a builder, taking a home remodel company's word for it may be a little bias. To make the most of your investment, get real world local market data from your professional realtor.