What Does Appraisal Mean In Real Estate?
If you're interested in buying a home or have just spent a few hours watching HGTV, you've probably heard the word "appraisal" used. Oxford Language, via Google, defines an appraisal as assessing something. In real estate, this means assessing the market value of a home. This is done by licensed professionals who evaluate the property and compare it with recent home sales in the area. Appraisals are often required by mortgage lenders to ensure that the person buying the home is paying a fair amount. This protects lenders from losing money.
In the case that a home buyer stops making payments on the home, the lender will want to make the money back by selling it. If the mortgage lender lends more money than the home is really worth, they will not be able to make their money back. It also helps buyers in negotiations because it prevents sellers from marking up prices beyond the market value. Appraisers factor in things like square footage, the condition of the home, the size of the property, and the number of bathrooms. According to Inman, even things like odors and the appearance of neighboring properties can affect an appraisal.
Different Types of Appraisals
According to Investopedia, there are three main methods appraisers use to evaluate properties, each using different factors to determine value. The three approaches are the sales comparison approach, the cost approach, and the income approach. Appraisers can use the methods together or independently.
The sales comparison approach uses the factors stated above, like location and square footage, along with sales of other homes to determine the market value of a home. In order to use this method, an appraiser must have a record of three comparable property sales from the past year. The cost approach evaluates how much a property costs to build and works under the assumption that a buyer should not pay more than it would cost to build an equivalent property. The cost approach gives the best estimation of market value when a property is new. The income approach evaluates market value by assessing how much the potential income a property can bring in. The formula for this approach is net operating income/ capitalization rate. This is commonly used for commercial properties as buyers are looking to rent out the properties to make a profit.
Once an appraiser evaluates a property, they will fill out an official report. If the report does not match the asking price for a home, the mortgage lender may not approve the loan, and the deal can fall through. Appraisals protect lenders and homebuyers from bad deals in real estate.