How Do Appraisers Determine the Value of a Home?

The appraised value of a home is a crucial piece of the home buying or selling process, and if you know how appraisers determine the value of a house, you can more accurately choose home renovations that will boost the value as a seller or get insight into the true value of your new home as a buyer. An appraiser will use a ton of research to produce their opinion of value. They’ll evaluate your location and neighborhood, research similar houses that have recently sold, and visit the house to check out the condition.

What Is a Home Appraisal? 

A home appraisal is an opinion of value based on data from the houses sold near your home’s location (comparables) and the house’s overall condition. Appraised values differ from market value, so your appraised value can be higher or lower than what your home sells for. Market value is what buyers are actually willing to pay for your home, whereas your lender will use the appraised value to determine if they’ll approve your loan or not.

Many buyers and sellers also use the appraised value to negotiate the sale price of a home. If an appraised value is below the offer price, a buyer may lower their offer to match the assessed value. If an appraised value is above the offer price, sellers may try to get the buyer to pay more, as a higher appraised value means they’re selling at a loss.

"A home’s value is based on two things: aesthetic and functionality,” says Kevin Reifsteck, licensed roofer at Huuso Exteriors. “If you’re looking to increase your return on investment (ROI) aesthetically, metal roofs or valleys, copper flashing, and awnings will help."

How Do Appraisers Calculate Home Value?

An appraiser can use one of three approaches to evaluate a property, which include looking at comparable sales, considering the cost to rebuild a home, and determining value based on the income an investment property generates. All of these strategies include an assessment of the property condition, as well.

Sales Comparison Approach

A sales comparison approach involves determining value based on recent sales of comparable properties. The appraiser looks at homes that are sold in the area and have similar features, such as the number of beds and baths, garage, style, age, and land size. This is often the only approach possible when it comes to land valuations, and it’s also the most common method for residential properties.

Cost Approach

With this approach, the appraiser shares what they think it would cost to build a replacement of the existing house, plus the land value, but minus depreciation. Appraisers often use this method for new houses that haven’t had the time to depreciate, and they may use it for unique properties or homes in remote areas that don’t have any recent comparable sales.

Income Approach 

If the property you’re considering buying is an investment property, your appraiser may use the income approach because the rental income earned is a component of the buying and selling decision-making process. This approach uses the property's potential or actual annual income to calculate its fair market value.

Factors That Determine Home Appraisal Value

There are many factors that can affect a home’s appraisal value, from the location and property size to functional obsolescence in the layout and the condition of materials and mechanicals in the home.

Location

You’ll often hear that real estate is all about “location, location, location,” and there are a few key reasons why it’s one of the most crucial things a local appraiser will consider when determining value. First, you can renovate or rebuild a home to change virtually anything about its layout and appearance, but one thing you can never change is its location.

Homes in more expensive areas usually have higher values, but appraisers will look at many other factors to determine how the location affects value.

• Proximity to schools: Being close to a school may be convenient for buyers with children, but traffic on nearby streets during pick-up and drop-off times can also be a nuisance and can reduce home value.

• Proximity to commercial or industrial property: Most buyers prefer not to live close to commercial or industrial property, so close proximity to these things can reduce value.

• Proximity to major roads, airports, and railroad tracks: The noise of road traffic, low-flying airplanes, and train activity is normally considered a nuisance, so homes close enough to be affected by the noise will often take a hit to value.

• Proximity to public transportation: Some appraisers consider close proximity to public transportation a positive thing that adds to the value, but many will also consider the related walkability and safety of the neighborhood.

• Corner property vs. a standard lot: Corner lots have more land, but they’re less valuable because there’s less privacy, and they often come with fence restrictions to ensure the fencing doesn’t block the view of traffic at the intersection.

Comparable Properties

Appraisers will most often take the sales comparison approach when determining the value of a residential property, which means comparable properties—called “comps”—play a major role in the value determination.

Appraisers will search for homes in the vicinity that are similar to the subject property that sold recently, normally within the past three to six months. These give the appraiser a good idea of what buyers are actually willing to pay for the property. They’ll often look to match as many of the following as possible:

• Square footage

• Lot size

• Home age

• Home condition

• Number of bedrooms

• Number of bathrooms

• Foundation type

• Location

Home Size and Layout

Homes with more square footage provide more value to buyers because they offer more living space, larger bedrooms, and the opportunity for more storage and functionality. As such, appraisers will take home size into account when determining value, sometimes even adjusting comp values on a per-square-foot basis when comparing to the subject.

Appraisers will also look for what’s called functional obsolescence, which refers to features that may have been acceptable in the past but aren’t common or sought after anymore. Examples include homes with just two bedrooms, homes with a single bathroom, homes with no garage and minimal street parking, and homes that have minimal closet and storage space. Functional obsolescence makes a home less usable and, therefore, less valuable.

Home Condition

Of course, the condition of a home is especially important when determining value, so appraisers will look at the age and condition of many different things to determine long-term value, including the following:

• Roof

• Siding

• Structural components

• Flooring

• Cabinets and countertops

• Windows

• Doors

• Insulation

• Electrical components

• HVAC equipment

• Plumbing components

• Appliances

Any major piece of the home that’s reaching the end of its life will detract from the value in an appraiser’s assessment because a buyer would need to account for replacement costs after closing.

Home Age

Finally, the home’s age can play a role in value assessment, as homes depreciate in value as their components—especially the structural pieces—age. Older homes will normally not be worth as much as newer homes since a buyer will likely get value for a longer time from newer construction.

What Happens After the Appraiser Is Finished? 

After the appraiser inspects your home thoroughly, they’ll then take one of the three approaches to value determination mentioned above. They’ll then compile all of the data from the previous research to complete the final opinion of value. The lender then receives the appraisal and decides whether it's a good investment for them to lend you the money.

Whoever paid for the appraisal—either the buyer or the seller—will also receive the value determination and a copy of the appraisal report.

Understanding the Appraisal Report

Understanding an appraisal report is important, whether you’re the buyer or the seller. As a seller, the appraiser you hired can help guide you toward repairs that will have the most positive impact on the value of your home and offer the highest ROI. As a buyer, the adjustment section may help you identify issues with the property you may not have noticed and how much they’ll affect the resale opportunity down the road. Ultimately, these perks make the cost of a home appraisal well worth the investment.

Most buyers and sellers will just want to double-check that the address and property information is correct and then look at the appraised value. Your assessment can stop there if you’re satisfied with the value or if it was in line with what you expected. However, you can dig further into the report to get more information.

• Look at the adjustments on comps: Especially if you’re a seller, look at the adjustments the appraiser made on comparable sales. You can identify what repairs would add the most value by looking at what differences between the comp and your property had the biggest impact on value.

• Look at notes about the location: If you’re a buyer, pay close attention to the location description. An appraiser may notice something you didn’t, like close proximity to a major road or airport or expected traffic on weekdays due to a nearby school.

• Consider checking the property income: If you’re purchasing an investment property, look at the appraiser’s section using the income approach. Investments are all about making numbers make sense, so look at what value you could get out of the property based on current or potential income.

• Pay attention to physical deficiencies: Appraisers will note issues with property conditions in the physical deficiency section. As a seller, you can use this information to guide pre-sale repairs. As a buyer, consider the section a to-do list of things you may need to pay for after closing.

• Check to see if the home conforms to the neighborhood: Finally, look at the notes about whether or not the home conforms to the neighborhood. If it doesn’t, you may have trouble selling down the road.