A real estate appraisal helps to quantify a property's value-the likely sales price the property would bring when offered in an open and competitive real estate market.
Your lender will require an appraisal when you ask to use real estate as collateral for a loan. Your lender need to insure the property will sell for at least the amount of money it is lending, in the event of a default.
Real estate agents use CMAs (Comparative Market Analysis) to help home sellers determine an asking price. A good agent will come close to an appraisal price with a CMA, but this is NOT an appraisal - an appraiser's report is much more detailed--and is the only valuation report a bank will use when making a lending decision.
Make sure your bank hires a certified appraiser - one who holds a current state license. Most banks do hire only certified appraisers, but in some states, ANYONE can do an appraisal - so check the appraiser's credentials.
There are two common ways an appraiser will look at your home:
1. Sales Comparison Approach
The appraiser estimates a home value by comparing it to similar properties that have sold recently in the area. The properties used are called comparables, or comps. This is generally considered the most reliable indicator of market value.
Since even similar homes will differ in terms of rooms, amenities, etc., the appraiser will first compare the comps to the subject property, then make financial adjustments to the comps in order to make their features more in-line with the subject property's. The result is a figure that shows what each comp would have sold for if it had the same components as the subject.
2. Cost Approach
The cost approach is most useful for new construction, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure at current building rates.
3.Income Approach
Typically only used with rental property.
The appraiser will reconcile the three approaches to value to come to a final figure. Keep in mind that an appraisal is nothing more that one appraiser's OPINION of value. It is not an absolute number. Another appraiser could come in and come up with a different figure. Good appraiser's values will come in very close to each other, however.
