Every real estate property has unique characteristics that make it different from the next. Even identical looking houses on the same street can have hidden factors that could create property value differences.
One house could have a newly renovated kitchen with brand new appliances and a finished basement while the house next door may need of major interior repairs.
These differences are not obvious from the outside, but will greatly affect the value as well as the sale price of the two homes.
In order for a financial institution to have an understanding of the value of the property compared to the application amount for a mortgage, an appraiser is called in to determine a market value of the residence.
That appraised value determines how much money the mortgage lender is willing to lend.
There are different ways for appraisers to arrive at that price value, but the most common for residential properties is the comparative or market method.
The appraiser compares recently sold properties similar in characteristics and area, information that can be solicited from the Multiple Listings (MLS) for no less than three comparative sales. After comparable recently sold properties are identified by the appraiser, adjustments are made for any specific differences in the properties that add or detract value.
The appraisal will show the potential sale value of the property within the last 90 days, to stay current with changing values. Along with coming up with comparable sales, an appraiser will measure the rooms of your home and look firsthand at the overall condition of the property.
If you are financing an older home the appraiser will state what the “remaining economic life” of the home is. If your home has a remaining economic life of 15 years, the amortization will be reduced accordingly.
The cost of the appraisal, normally borne by the borrower, is $300 to $350. Financing is always based on the lesser of the appraised value or the purchase price.
When it comes to property over five acres, some money lenders will only accept appraisals based on a maximum five acres plus the residence. Others will give value for the full acreage and whatever other improvements are on the property.
