When you receive a home appraisal report, it contains valuable information about how your property’s value was determined. Learning to interpret the key elements will help you understand the appraisal process.
Overview of Approaches to Value
Appraisals estimate value using three approaches:
- Sales Comparison Approach: Compares your home to recent sales of similar properties. This is given the most weight in valuing single-family homes.
- Cost Approach: Calculates current construction cost to replace your home, minus depreciation. This approach has limited use for older homes.
- Income Approach: Analyses how much rental income your property could generate. Mainly applied to income-producing properties, not primary residences.
The appraiser considers results from all approaches, but the sales comparison is typically most important.
Adjustments and Comparable Sales
The appraisal will include a grid listing sales the appraiser deemed comparable to your home. It will note aspects like square footage, bedrooms, location, and condition for each sale, along with dollar adjustments applied to account for differences between the comparables and your home.
If few adjustments were needed, it indicates your home aligns closely with the local market. Large adjustments suggest it differs significantly from recent sales.
Final Value Conclusions
The appraisal reconciliation explains how the appraiser weighed the approaches to reach a final opinion of value. It will also state the effective date of the appraisal and final estimated value of your property.
Lenders require appraisals to be close to the purchase price, so low appraisals may present issues getting financing. Understanding the report helps you identify any questionable adjustments or conclusions.
With a complete review of the key components, you can gain a deeper understanding of the methodology and factors considered when appraising your home. This allows you to be an informed stakeholder in the valuation process.