How Do Appraisers Determine Home Value?

Gathering Property and Market Data

Appraisers begin their process by collecting comprehensive data about the property and its surrounding market conditions. This initial phase involves a detailed on-site inspection of the subject property to gather specific physical characteristics. During this inspection, the appraiser measures the home’s exterior to confirm its gross living area, noting the number of rooms, bedrooms, and bathrooms, along with the overall layout and functional utility. They also assess the property’s condition, the quality of its construction, any recent upgrades, or unique features like finished basements, garages, or specialized amenities, including lot size and notable views.

Beyond the physical inspection, appraisers conduct thorough research into the local market. This research involves analyzing current real estate trends, including supply and demand dynamics, recent sales activity, and average days properties remain on the market. They also consider broader neighborhood characteristics such as amenities, zoning regulations, and any potential external factors that might influence value, such as proximity to undesirable features.

A significant part of market data collection involves identifying comparable sales. These are properties similar to the subject property that have recently sold in the immediate vicinity. Appraisers prioritize comparables based on their proximity to the subject property, the recency of their sale (typically within the last six months to a year), and their similarity in terms of size, age, condition, features, and lot size.

Core Valuation Methods

The sales comparison approach is the primary method for valuing residential properties. This approach involves comparing the subject property to comparable sales. Appraisers analyze the differences between the subject property and each comparable, making adjustments to the comparable properties’ sales prices to account for these variations. The intent is to estimate what each comparable would have sold for if it were identical to the subject property.

Adjustments are made for various factors such as differences in square footage, lot size, number of bedrooms and bathrooms, and the presence of features like a garage or a finished basement. Condition, age, quality of construction, and recent renovations also necessitate adjustments. For example, if a comparable property has a feature the subject property lacks, the comparable’s sale price is adjusted downward to reflect that difference. Conversely, if the comparable lacks a feature present in the subject property, its price is adjusted upward.

The cost approach is another valuation method, primarily used for new construction or properties where comparable sales are scarce or unreliable. This method estimates the cost to rebuild the home new, subtracting any depreciation due to age or condition, and then adding the value of the land. It provides a ceiling for value, as a buyer would generally not pay more for an existing property than the cost to replace it with a new one. This approach can be less applicable for older homes where depreciation is difficult to quantify accurately.

The income approach is generally not applicable to typical single-family residential appraisals unless the property is primarily purchased for its income-generating potential, such as a rental property. For standard residential appraisals, where the primary purpose is owner occupancy, this approach is rarely used.

Refining Value Through Adjustments and Reconciliation

Adjustments are applied to the comparable sales to account for disparities with the subject property. These adjustments reflect the market’s reaction to various property characteristics. Differences in gross living area, the number of bedrooms or bathrooms, garage capacity, or the presence of a finished basement often require specific dollar adjustments. Factors like a swimming pool, a deck, recent renovations, overall condition, or a superior view also lead to adjustments.

The dollar amount for each adjustment is derived from market data, reflecting what buyers in a specific market are willing to pay for a particular feature or characteristic. For example, if homes with a two-car garage consistently sell for $10,000 more than similar homes with a one-car garage, an appraiser might apply a $10,000 adjustment. These adjustments are always made to the comparable properties, never to the subject property, ensuring that the subject property remains the benchmark against which others are measured.

After applying adjustments to each comparable sale, the appraiser arrives at a range of adjusted sales prices for the comparable properties. The next step, reconciliation, involves reviewing these adjusted values to form a single, final opinion of the subject property’s value. This process is not a simple averaging. Instead, the appraiser weighs the adjusted sales prices, giving more consideration to the comparables that required fewer adjustments, are most similar, or are more recent sales.

The appraiser prioritizes sales closest in proximity and most reflective of the subject property’s characteristics, considering the reliability of the data for each comparable. Other market factors are also considered during reconciliation, such as current supply and demand conditions, prevailing interest rates, and overall neighborhood trends. Any property-specific issues, such as functional obsolescence or deferred maintenance, are also factored into this final judgment.

The Appraisal Report

The appraisal report is typically presented on standardized forms. For most residential properties, the Uniform Residential Appraisal Report (URAR), also known as Fannie Mae Form 1004, is widely used. This standardized format ensures consistency and provides a clear, structured presentation of the appraiser’s findings and valuation conclusion.

The report includes several key sections. It begins with the identification of the subject property and a clear statement of the appraisal’s purpose and the effective date of the value opinion. A detailed neighborhood analysis follows, describing the area’s characteristics, trends, and influences on value. The report also includes a thorough description of the subject property’s site and improvements, noting features, condition, and any observed deficiencies.

The report includes the comparable sales data and the detailed adjustments made to each comparable. This section shows how differences between the subject and comparable properties were quantified. The report then presents the reconciliation of value, explaining how the final value conclusion was derived. The appraiser also includes certifications affirming their independence and adherence to professional standards, along with limiting conditions that define the scope of the appraisal.

Supporting documentation, such as photographs of the subject and comparable properties, location maps, and sometimes floor plans, are included. These visual aids provide context and evidence for the appraiser’s observations and conclusions. The completed report provides an unbiased opinion of value, which is often relied upon by lenders, buyers, and sellers for various real estate transactions.

Citations

1. “Uniform Residential Appraisal Report (URAR) Form 1004 Explained”, The Appraisal Foundation.