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.

Home Price Valuation

• The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the physical deterioration, the functional obsolescence and the economic obsolescence. The remainder is added to the land value.
  
• The comparison approach to determining value makes use of other "benchmark" properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property. This helps in determining your appraisal value.

• The income approach to determining value is of primary importance in ascertaining the value of income producing properties and has little weight in residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.

Appraisal Generated

Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated. Thus an appraisal is generated for your property. 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

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.

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