Talking about what your home is worthless until you have the money in hand. The biggest determining factor of your home’s value in the buying process is the appraisal. Lenders want the house to be worth as much as the buyer is paying for it – which is why the appraisal is so very important.
An appraiser has three tricks up his sleeve to help him (or her!) determine the value of your home: the sales comparison approach, the cost approach, the income approach. All of these approaches to value can be used on a single appraisal. However, the appraiser has the option to omit an approach if it is not applicable to the appraisal in question.
The most important thing that an appraiser uses in determining the value of your home is the price that other homes in the area have recently sold for. This is called the sales comparison method. This is the most reliable method that appraisers typically put the most weight on when determining the value of a single family home.
Basically, and appraiser needs a minimum of three closed sales in your house’s neighborhood that have closed in the past six months. Usually the appraiser will back up their findings with an active listing or pending sale to help support the value they have determined your property is worth. However, it’s very important to remember that even though a house may be on the market for a lot more than any of the closed sales have sold for, an appraiser cannot use that higher value until the sale has closed.
In some cases, especially for unique or complex properties such as homes valued over 1 million or income producing properties, an appraiser may have to go beyond six months to find recent similar sales. However, in today’s market this is very uncommon due to the high turnover of properties and the high increase in values.
The income approach is used most commonly for rental properties including non owner occupied single family residences and units. With this approach the value of the home is based upon the rent it will draw in the current market. By multiplying the rent by a constant number (dictated by the current market) the appraiser arrives at a value for the home.
The cost approach is the last tool an appraiser has to determine the value of a home. With this method the appraiser estimates the value of the land and the cost to rebuild the home in today’s market. The appraiser has manuals such as Marshall & Swift that help him determine the cost to rebuild the house.
If there is no data to help the appraiser determine the value of the land, such as with land sales in the recent area, the appraiser derives the value of the land based upon the cost to build. It sounds a little tricky, but it turns out that these derived values end up being very close to the actual price that a vacant piece of land would go for.