A written estimate of the value of real or personal property prepared by a qualified appraiser. Mortgage lenders almost always require a property appraisal before approving a home loan.
Appraisers usually make use of three methods when valuing homes. The most popular method is the “sales comparison” method. It involves examining recent home sales in the area (often called “comparables” or “comps”) and selecting the ones most like the property being appraised (the “subject property”). The subject property’s condition, construction quality and features are compared to the comps, and its value is adjusted up or down. For example, if an appraiser is appraising a house in a development or tract, and an identical home sold recently for $200,000, she might start at that value. If the subject property has a better view or nicer landscaping, its value might be increased by $10,000. If, however, it hasn’t been maintained as well as its comp, the appraiser might subtract $5,000. After a series of many adjustments has been completed, the appraiser arrives at a final value.
Another method is the “cost approach.” The appraiser calculates what it would cost to buy an identical lot and construct that same house, then subtracts for depreciation and arrives at the appraised value.
Finally, there is the “income” approach. This is used primarily when valuing investment or rental property. The appraiser takes the rental income of either the subject property (if rented) or similar comps, and calculates the price that would provide the rate of return a typical investor would require for a similar property.