What have similar nearby homes actually sold for? This is the approach residential appraisal leans on, because buyers of homes compare homes. Most of the class below is about it.
How an appraiser builds a value, in one short class.
Three approaches, comparable sales, adjustments and living area. Plain words and one worked example.
Start the class
What is an appraisal?
An appraisal is an independent opinion of market value produced by a licensed or certified appraiser. In the United States appraisers work under USPAP, the Uniform Standards of Professional Appraisal Practice, and most home appraisals for mortgages are written on the Uniform Residential Appraisal Report, Fannie Mae Form 1004. Everything below is how the appraiser gets from a property to one supported number on that form.
What are the three approaches to value?
There are three ways to reach a value. Each asks a different question about what a buyer would pay. The appraiser weighs whichever ones the property and the market support.
What would it cost to build this home new today, minus wear and age, plus the value of the land? It helps with newer homes and with unusual properties that have few comparable sales.
What is the property worth based on the rent it can earn? It is central for rental and commercial property, and rarely the main approach for an owner occupied home.
How do comparable sales and adjustments work?
Comparable sales, called comps, are recent sales of similar nearby property. No comp is identical to the home being appraised, the subject. So the appraiser adjusts each comp toward the subject: if the comp has something the subject lacks, its price is adjusted down; if it lacks something the subject has, its price is adjusted up. The question is always what that difference is worth to buyers in that market.
| Comp sale | Difference from the subject | Adjustment |
|---|---|---|
| Sold price | Similar street, sold recently | $400,000 |
| Bathrooms | Comp has one more bathroom | minus $10,000 |
| Garage | Comp has no garage, subject does | plus $15,000 |
| Adjusted price | What this comp says the subject is worth | $405,000 |
The appraiser does this for several comps, then reconciles the adjusted prices into one opinion of value, giving the most weight to the comps that needed the fewest and smallest adjustments.
How is living area measured?
Gross living area is finished, heated, above grade square footage. It is the size figure comps are compared on, so an error here carries through every comp.
Counts as living area
- Finished rooms above ground level
- Spaces heated like the rest of the home
- Every above grade floor of the home
Counted separately
- Basements, even finished ones
- Garages
- Unheated porches and storage
Quick check
A comp has a pool and the subject does not. Up or down?
Down. The comp has something the subject lacks, so its price is adjusted down toward the subject, by whatever a pool is worth to buyers in that market.
Is a finished basement part of gross living area?
No. Basements are counted separately from gross living area, even when they are finished. They still add value, just on their own line.
Is an online home estimate an appraisal?
No. An automated valuation model is an algorithm. It is not an appraisal and carries no appraiser signature or liability.
Terms to know
- USPAP
- The Uniform Standards of Professional Appraisal Practice, the standard appraisers work under in the United States.
- Form 1004
- The Uniform Residential Appraisal Report, the most common residential report form.
- UAD
- The Uniform Appraisal Dataset, which standardizes how appraisal data is reported. Version 3.6 is the current redesign.
- Reconciliation
- The step where the appraiser weighs the evidence and settles on one opinion of value.
Class over. When you need the real thing, order a residential appraisal from Pocket Appraisal.