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Appraisal Methods

This page explains the best appraisal methods used as a standard for the USA. These methods estimate the home price valuation and are necessary for getting a loan for a house.

What an appraisal is actually, it's the opinion or an estimate of value by a licensed person. Each state has certain qualifications this person must meet to establish these values. There are 3 common ways this is done using the surrounding market.

Home Price Valuation

First we have the actual cost approach. This is an estimate of what it would cost to replace the property as of the date the appraisal is being done. 

They do subtract for any deterioration to the home. Also any decline in usefulness of property is taken into consideration. Likewise any economic declines are considered. Then everything is added to the land value.

Second we have the comparison approach when deciding on value. Looking at properties nearby that have sold recently that are very much like the subject property in size and quality helps to establish sort of a benchmark.

The the third way is the income approach. This is especially important when determining value on rental properties. What this does is help to figure out what a investor would pay for the property based on how much income the home would produce.

Appraisal Generated

appraisal methods

After the mortgage meltdown, appraisals are being scrutinized much closer than every before. This is good for the first time home buyer since you can be sure that the home you are buying has been priced correctly. So a final report is generated and the value that gets determined is used for the mortgage process.

As mentioned, each appraiser is licensed by their state and a code is maintained for all the appraisal methods used.

Keep in mind when mortgage rates rise, property values level off or, in some cases, decline, especially after a sustained period of steady increases. As a first time home buyer, do not be surprised to see this happen, especially in some of the higher-priced markets.

In real estate, what goes up too high, too fast, must come down. You may hear statements like, “I paid more than that for the property two years ago,” “property in this neighborhood has always gone up in value in the past. Let’s get another appraisal,” or “it was appraised a year ago for more than that. Does this appraiser not know what he is doing?” This is not the appraiser’s fault.

Getting a Loan For a House - Appraisal Methods Required

Before a lender will loan money on any property, they want to see if the value of the property is worth the loan. Thus an appraisal is necessary in getting a loan for a house.

These appraisal methods are somewhat constant throughout the country. A good rule of thumb I always say is that a house is worth what a buyer is willing to pay and a seller is willing to sell it for. There’s no magic formulas. Listen to your market.

Where would you like to go next?

So have you found a home? Are you thinking about getting qualified for a mortgage? Maybe you want to visit our page on how to qualify for a mortgage.

Would you like to know how much you may need for a down payment? Consider playing with our down payment calculator.

Are you ready to get pre-approved for a home loan? For a step by step process on getting started visit this page to apply online.

Leave Appraisal Methods and return to Appraisal Basics main page.

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