When you purchase a new home and use financing, the lender will require an appraisal, or valuation of the home, to be performed. An appraiser is a professional who provides an objective and unbiased estimate of a property’s value. Here’s how an appraiser determines the value of the home you are looking to purchase:
The first step in the appraisal process is the inspection. The appraiser will visit the property and inspect the interior and exterior of the house, as well as the surrounding area. During the inspection, the appraiser will take note of the size, condition, and features of the property. They will also look for any obvious issues that could affect the value of the property, such as damage or structural issues.
Comparable sales analysis
After the inspection, the appraiser will research the local real estate market and gather data on comparable sales in the area. Comparable sales are recently sold properties that are similar in size, condition, and features to the subject property. The appraiser will use these sales to determine the market value of the subject property. This process is called a comparative market analysis (CMA).
The appraiser will use different valuation methods to determine the value of the property. The most common valuation methods are the sales comparison approach, the cost approach, and the income approach.
Sales comparison approach: This method is based on the principle of substitution, which states that a buyer will pay no more for a property than the cost of purchasing a similar property. The appraiser will use comparable sales data to estimate the value of the subject property.
Cost approach: This method estimates the cost of replacing the property, minus any depreciation. The appraiser will consider the cost of materials, labor, and other factors to determine the cost of building a similar property. This method is more commonly used for new construction and special-use properties.
Income approach: This method is used for income-generating properties such as rental properties or commercial buildings. The appraiser will estimate the potential income from the property and subtract the expenses to arrive at the net operating income. They will then apply a capitalization rate to the net operating income to determine the value of the property.
Final report Once the appraiser has completed the valuation process, they will compile a final report. The report will include a description of the property, the valuation methods used, comparable sales data, and any other relevant information. The report will also include the appraiser’s final estimate of the value of the property.