Appraisal – a value analysis of your property from a certified or licensed appraiser hired by the lender during the home purchase or refinance process.

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Home appraisals are different from home inspections because they are conducted to determine the value of a home for the benefit of the lender. Home inspections are focused on the buyer’s interests and the home repairs needed before completing the purchase. 

 

Home Appraisal Process - 

1. The lender orders an appraisal and selects an appraiser

2. The appraiser contacts the seller to schedule a property visit

3. The appraiser inspects the exterior and interior of the home, as well as the lot, and gathers information on the condition, size, location, and renovations of the property

4. The appraiser completes a detailed report of the property’s valuation and shares it with the lender and the buyer

5. The buyer pays for the appraisal

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Economic Principles Affecting Valuation - 

1. Principle of Anticipation
Buyers buy properties for future benefits. The principle says that value rises using anticipated benefits (money or amenities) to be gained from a property in the future. 

 

2. Principle Of Demand, Supply, and Desire
The scarcity of a commodity influences its value by creating a greater demand for the item.  Demand is also affected by desire. If there is an oversupply of apartments in a given area, the demand will reduce. The values and rents will go down.

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3. Principle Of Substitution
The value of a property tends to be set at the cost of an equally desirable substitute property. In theory, no one should pay more for a property than what it would cost to obtain a site by purchase and sale and to construct a building of equal appeal and utility.

 

4. Principle Of Balance
This principle refers to the relationship between cost, added cost and the value it returns. For each dollar invested, the value should increase by more than one dollar.

 

5. Principle Of Progression
The idea behind this principle is, the price of a property escalates with an increased perceived value of a location. 

 

6. Principle Of Regression
This is the opposite of progression principle. The price of a property decreases with a reduced perceived value of a site. For example, even if you have the best house in a neighborhood of storm- hit homes, the value of your property will go down.

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Sales Comparison Approach - a real estate appraisal method that compares one property to comparables, or other recently sold properties in the area with similar characteristics. 

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Cost Approach - a fundamental method in real estate valuation that provides valuable insights into the worth of a property. It is an approach that calculates the property’s value based on the cost of constructing an equivalent building from the ground up, accounting for land value and depreciation.

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Income Approach - a type of real estate appraisal method that allows investors to estimate the value of a property based on the income the property generates. It’s used by taking the net operating income (NOI) of the rent collected and dividing it by the capitalization rate.

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Capitalization Rate - This measure is computed based on the net income that the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage.

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Comparative Market Analysis (CMA) - an estimate of a home's price used to help sellers set listing prices and help buyers make competitive offers. The analysis considers the location, age, size, construction, style, condition, and other factors for the property and comparables.

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Broker Price Opinion (BPO) - ordered by a lender or bank to value a property that could be in the process of being foreclosed, or refinanced.  

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Automated Valuation Model (AVM) - a term for a service that combines mathematical or statistical modeling with databases of existing properties and transactions to calculate real estate values.