How do appraiser’s determine a homes value?

Tuesday, October 6, 2009

This question comes up more frequently with buyers especially now with so many changes to the way banks do business.  In answer to this, a detailed description of appraiser’s methods is below. There are Three Approaches to Determining a Home’s Value:

Cost Approach

This approach assumes that a potential purchaser would consider building a substitute residence that has the same utility and use as the subject property being appraised. The appraiser arrives at the indicated value of the property by estimating the reproduction cost of improvements, subtracting the amount of depreciation by all causes, and adding the estimated value of the site as if it were vacant. The appraiser estimates land value by analyzing comparable sized land sales.

Sales Comparison Approach (aka Market Approach)

This approach is an analysis of recent sales that are the most comparable to the subject property. An appraiser must analyze a minimum of three comparable sales that were settled or closed within the last 12 months. An appraiser must comment on sales that are more than six months old.

Income Approach

Normally this approach is not applicable to single-family properties. However, if a single family home is being utilized as an investment property, the appraiser must prepare a single-family comparable rental schedule (Form 1007) in addition to the appropriate appraisal report

Adjustments to Comparable Sales

The appraiser’s analysis must take into consideration all factors that have an impact on value, recognizing that a well-informed buyer will not pay more for this property than the price they would pay for a similar property of equal desirability and utility. To accomplish this, the appraiser must analyze all closed and settled sales, contract sales, and current listings of properties that are the most comparable to the subject property.

Because the appraiser’s estimate of market value is no better than the reliability of the comparable data that is utilized, the appraiser must exercise diligence to ensure that the comparable sales data is reliable. The appraiser must report each comparable sale on the appropriate appraisal report form and must report a minimum of three comparable sales as part of the sales comparison approach.

Each comparable sale that is utilized must be analyzed for differences and similarities between it and the property being appraised. The appraiser must make appropriate adjustments for location, terms, and conditions of the sale, date of sale, and physical characteristics. Specific guidelines have been set for adjustments regarding proximity to subject, date of sale, and net or gross adjustments:

Proximity to Subject: Sales should be located within one mile of the subject.

Date of Sale: Comparable sales should have closed within 12 months of an appraisal’s effective date.

Net & Gross Adjustments: Adjustments are changes in the value of a comparable property made when comparing the features of the comparable property to the subject property. A net adjustment is the positive or negative value assigned to each feature. The gross adjustment is the sum of those values for each property. The dollar amount of the net adjustments for each comparable sale should not exceed 15% of the sales price of the comparable. The dollar amount of the gross adjustment for each comparable sale should not exceed 25% of the sales price of the comparable.

Sales or Financing Concessions: The dollar amount of sales or financing concessions paid by the seller. Examples of sales or financing concessions include interest rate buydowns, loan discount points, loan origination fees, and closing costs customarily paid by the buyer. The appraiser must obtain this information from the individual who is a party to the concessions. The dollar amount of the concessions is adjusted negatively in the sales grid.

Rural Properties

Because rural properties often are situated on large lots, and rural neighborhoods can be relatively underdeveloped, there may be a shortage or absence of recent comparable sales in the immediate vicinity of the subject property. This means that the appraiser will often need to select comparable sales that are located a considerable distance from the subject property.

In such cases, the appraiser must use his or her knowledge of the area and apply good judgment in selecting comparable sales that are the best indicators of value for the subject property. The appraiser should include an explanation in his or her report of why the particular comparables were selected in his or her analysis.


Jones Ramirez - Tuesday, April 19, 2011 @ 10:07 PM
Thank you for the work you have done into this post, it helps clear up a few questions I had.

Comments subject to review.
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Estella said
"That is a beautiful shot with very good lighting ." about Women Consider Owning a Home to be a Vital Component of the American Dream
on Sunday, May 12, 2013 @ 9:57 AM

Chris White - Team Leader said
"Unfortunately you are not alone. It's more than an outcry. The powers that be really need to come down harder on Bofa than they already are. Working on these short sale for over 2 years now I've uncovered down right fraud happening on the lenders parts. If they cared more about moving this country forward than protecting their own wallets then they would cut the red tape and approve these short sales in a timely manner. Our team made the wise decision to get BofA loans which were FHA or Freddie Mac backed, approved prior to listing on the market. Then we can list the home as "Price Approved" and close in 30 days. In this instance BofA does a full appraisal, rather than an incompetent "Broker Price Opinion" (nothing against agents but they have no idea how to make adjustments on comparable homes) and then the bank issues an "Approval To Participate" letter which dictates what price we can go on the market and take anything north of 88%. I really do hope your situation improves. " about Congressional Bill to Speed Up Short Sales
on Tuesday, August 30, 2011 @ 9:15 AM

Lisa Zeiner said
"We made an offer 4 months ago to BofA, and have heard nothing. It was a cash offer which is better than the zero money they are collecting now. And since the people don't care they are trashing the place, by the time BofA gets around to it our offer will be gone as the place is a mess!! Septic issues now, garbage being dumnped. All of this could have been avoided if BofA really wanted to correct their cash flow problem and sell these properties in a timely manner. They cry about cash but then do nothing intelligent to fix the problem" about Congressional Bill to Speed Up Short Sales
on Tuesday, August 30, 2011 @ 9:06 AM

Jones Ramirez said
"Thank you for the work you have done into this post, it helps clear up a few questions I had." about How do appraiser’s determine a homes value?
on Tuesday, April 19, 2011 @ 10:07 PM

HollyRobsonf said
"Hey - I am certainly happy to find this. great job!" about Bank of America to Offer Principal Reduction to Underwater Borrowers
on Wednesday, April 13, 2011 @ 6:45 PM