Downloadable PDF Brochure from The Appraisal Institute
Estimating Home Value
How can I find out what my house
As a homeowner, you may have reason to question the value of your home on various
occasions. These may include planning to buy or sell a home, appealing your property tax assessment, seeking to eliminate
payment of private mortgage insurance or undertaking a major home renovation project. Valuation consultants will tell you
that your home may have different values for different purposes.
MARKET VALUE: For buying and selling,
market value can indicate the most probable price at which a home should sell in a fair sale in a competitive market.
VALUE: The insurable value—the cost of replacing your property if it were destroyed or damaged—can used
to underwrite fire and hazard insurance.
ASSESSMENT VALUE: Real estate taxes are generally based on
the assessed value of your home, as estimated by your local assessor; this value is usually based on market value.
When an Appraisal Is Needed
Buying or Selling a Home
If you're planning
to sell your home, setting an appropriate listing price can help to speed the sale. An appraiser, using market data, arrives
at an opinion of market value that can help you decide on a fair listing price. Similarly, when you're shopping for a new
home, a professional appraisal can indicate if the listing prices of homes you're considering are in line with the actual
sale prices of similar properties.
Transfer of ownership typically involves a mortgage, and an appraisal usually is
required before a home loan is approved. Lending institutions may require an appraisal of property that will be used as security
for a mortgage, and this opinion of value plays a key role in mortgage application approval and the amount of down payment
Canceling Private Mortgage Insurance
New homeowners are frequently required to obtain private
mortgage insurance, but as a result of legislation passed by Congress in 1998, homeowners can cancel this coverage when their
loan to value ratio reaches 80 percent. To take advantage of this option a homeowner generally must have a good payment history
and satisfy the holder of the mortgage that the value of the property has not declined below its original value. An appraiser
can develop an opinion of the current value of the home, which will assist the homeowner in deciding whether or not to ask
the lender to drop mortgage insurance.
Relocating for a Job
Real estate appraisals are often needed by
relocation firms that assist employers in the transfer of their employees. Sometimes, the relocation firm offers to purchase
an employee's home if the employee is unable to sell the home during a specified time period. An appraiser is called in to
estimate the market value of the home; this estimate of value helps the relocation firm decide how much to pay for the property.
The appraiser may be selected by the relocation firm, the employer or by the homeowner-employee, depending on the relocation
Appealing Your Tax Assessment
In most communities real estate taxes are based on an ad
valorem ("according to value") assessment of your property's value. If you believe the assessed value is unfair, you
may have the right to appeal the assessor's valuation. Many assessment appeals can be resolved with a telephone call or letter
to your local assessor. If a dispute is carried beyond this point, however, you may want a professional appraiser to give
you an independent opinion of value to bolster your appeal to the assessor.
Insuring Your Home
most reputable insurance brokers can tell you if your fire and hazard coverage is sufficient, there are properties that may
require a closer examination—for example, older buildings, custombuilt homes or properties with unusual features such
as solar energy collectors. An appraiser can give an opinion of the insurable value of your home by using the cost approach.
Many homeowners today are choosing to fix up rather than trade up: to remodel and enlarge a present
home rather than move to another home. But don't count on receiving a dollar-for-dollar return at resale time—improvements
may not return their costs. Some highly personalized improvements can even handicap the sale of your home. If you're considering
improving your home with the intention of increasing its resale value, an appraiser can help you decide which improvements
make the most economic sense.
If you're undertaking a major rehabilitation project, a feasibility study can be very
useful. The appraiser conducting the study analyzes the condition of the property and the cost of rehabilitation and prepares
an estimate of the property's value after improvement (the improved value will affect the ad valorem real estate tax). In
addition, the appraiser will examine the surrounding neighborhood in terms of growth, structure and change. The appraiser
can also investigate whether your property qualifies for historic preservation benefits from the federal and local governments.
All of the data, gathered and analyzed by the professional appraiser, can aid you in your decision to rehabilitate.
Decisions Requiring Appraisals
An experienced, professional appraiser can assist in many other real estate decisions.
Appraisers often are asked to estimate "just compensation" in situations where the government takes private property for public
use, such as for a road or public park. The law requires that owners of the property taken in this manner must be paid a fair
price. Appraisers also can give an opinion of value of property for gift or inheritance taxes, lease rental schedules and
other investment purposes.
The Appraisal Process
appraiser needs to know the purpose of an appraisal to begin the process of valuation. The appraiser will propose an appropriate
fee based on the estimated work involved in the assignment. Fees vary according to the complexity of an assignment and appraiser's
experience, special expertise and reputation. Professional appraisers do not structure their fees contingent on the final
conclusion of value.
Approaches to Value
Appraisers generally use three basic methods to arrive at a conclusion
of property value: the sales comparison approach, the cost approach and the income capitalization approach.
Wherever appropriate, all three methods are used in an appraisal.
SALES COMPARISON APPROACH: The sales
comparison approach is used to compare sales of similar properties, taking into account differences among properties that
may affect value. The sales comparison approach is typically the most applicable method of valuing single-family houses, townhouses
COST APPROACH: The cost approach is based on the current cost of replacing or reproducing
a property. After estimating the cost of building the structures on a property, and deducting an amount for depreciation,
the appraiser adds the estimated value of the land and arrives at an indication of value. This method is particularly useful
for estimating insurable value.
INCOME CAPITALIZATION APPROACH: The income capitalization approach
is based on a property's potential rent. This method is obviously most useful for valuing income-producing properties, but
it can be applied whenever rental figures from similar properties indicate what the potential rental income would be if your
property was leased.
Generally, the appraiser inspects your property, collects specific data about it as well as comparable
properties in the same market, and analyzes general information about the property market. Using one or more of the three
methods of estimating value, the appraiser arrives at a final conclusion.
The appraiser's final opinion of value and
supporting data are typically presented in a written appraisal report. Many single-family residential appraisals are reported
on a standard form used by most lending institutions; some appraisals require detailed narrative reports supplemented with
statistical data and photographs. Regardless of the report's format, the appraiser must be able to support the conclusions
and explain the process clearly. Throughout the process, the appraiser uses professional judgment.
The Value of a Good Appraiser
Whatever the reason that calls for a value estimate of
your home, you should engage the services of a designated member of the Appraisal Institute. These professionals have met
stringent education, experience and ethics requirements that surpass many of those required for state licensure. Reflecting
their unbiased and objective approach to real property appraisal and analysis, members of the Appraisal Institute are required
to adhere to a strictly enforced Code of Professional Ethics and Standards of Professional Appraisal Practice. Appraisal Institute
members may hold the prestigious MAI, SRPA and SRA designations.