How Home Appraisals Are DeterminedTopic: Real Estate Value
A formal appraisal is a detailed look at a property that is then compared to recently sold homes of similar style and design to determine its true value. An appraisal is performed by a licensed real estate agent or appraiser who has been trained to determine the value of real estate.
There are three basic levels of appraisal.
1. A full appraisal is a detailed inspection with pictures documenting areas specifically pointed out in the report and a detailed analysis of comparables. Appraisers are taught what to look for in terms of structural condition and to do their own measurements to make sure descriptions of the property are accurate. Generally, appraisals cost between $250 and $500, depending on the property type and size.
2. A Broker's Price Opinion (BPO) is a less-detailed opinion of the price of the property. They can either be external ("drive-by"), or internal ("walk through"). Brokers can vary widely on how detailed their physical inspection of the property will be. Also, they may not be very familiar with the community or able to assess comparables accurately. Lenders generally pay $60 to $120 per BPO for a residential property, so the amount of time they take will be limited.
3. A CMA (or Comparative Market Analysis) is performed by an agent or broker to determine the fair market value of a home. They may or may not have seen the house or asked the owner about condition before their analysis. Usually the comps are based on what other homes on the market are listed at and may not necessarily be realistic as to an actual sale value. A homeowner who wants a more accurate assessment of the value of their home will get a full appraisal.
The appraiser then considers several factors:
1. The homes must be of similar style and design. Three bedroom homes will be compared to other three bedroom homes. A home 1,600 sf, 1 ?? story brick home will be compared with a similar size and style home. If recently sold comps cannot be found, the appraiser compensates for the differences in size, number of rooms, style and condition. Age is also a factor in the comps, although not as important as factors of size and number of rooms, or style.
2. Nearby comparable homes. Generally three within a quarter mile of each other and within the city boundaries are required. If three cannot be found within a quarter mile, the distance expands to a half mile or further (sometimes necessary in more rural areas). The farther the appraiser needs to go, the less comparable they will be due to neighborhood boundaries and other factors that can affect the value of neighborhoods. As an Investor, you should be aware of the differences that exist between the property and the comps.
3. The comparables that have sold recently. Appraisers look for comps that were sold within the last 30 days first, then move the time frame out to 60 or 90 days if necessary. In some communities, prices are falling so rapidly that even a 30 day gap can affect the valuation. In defending a lower offer be prepared to pinpoint exactly what the drops have been in the neighborhood over a 30-90 day period or longer. This could substantially impact your ability to get an offer approved.
4. Home condition. Appraisals or BPOs may vary widely in the degree to which the home is inspected. A full appraisal may contain a home inspection that points out problems with condition and include pictures of problem areas. Most of the time inspections are cursory and the appraisal will peg the condition as "normal," "poor," or "above average."