How Do Home Appraisers Even Come Up with Their Estimates?

Some real estate and real estate-related transactions need a home appraisal before they can proceed. For example, if you are planning to get a mortgage, your mortgage lender might order a home appraisal to make sure that you will not be getting more cash than what your home is actually worth. Other times, you might need a home appraisal because you want to either insure your home, challenge unreasonable property taxes, or know the selling price that you should set in order to get a fast but nonetheless fair outcome.

Summed up, it is clear that a home appraisal is important to your interests, meaning that you want to avoid the potential problems with the home appraisal process as much as possible. After all, while home appraisers are supposed to be unbiased professionals, there is a limit to what they can do when it comes to appraising a home’s fair market value, meaning that there are certain circumstances that can distort the outcome to the detriment of the homeowner.

Here are three of the most popular methods that home appraisers will use for their home appraisals:

Cost

Like the name suggests, the cost method starts by figuring out the cost needed to replicate the home in the present. This means coming up with a value for the land on which the home is built before coming up with a value for the building by looking at the costs for the manpower and materials needed to build it as well as the costs for the manpower and materials needed for subsequent renovations. Bear in mind that inflation can have a significant impact on the costs for manpower and materials, meaning that the original costs must be translated into their modern counterparts before the home appraisal can continue.

Afterwards, the home appraiser will then estimate the home’s useful lifespan, which is how long it can be expected to remain useful to the homeowner, before deducting a portion of its value as depreciation based on how long it has been in use. There are a number of depreciation methods that can see use when it comes to homes, but most home appraisers will also let their experience-informed instincts determine part of the results because depreciation methods are meant to be estimates rather than perfect assessors of particular situations. The result of the depreciation being deducted from the cost of land plus the cost of manpower and materials is supposed to be an estimate of the home’s fair market value, which is what it would be able to fetch on the real estate market if it was sold at that point in time.

Income

Income sees less use than the other two methods mentioned here because it is more applicable to a particular segment of real estate properties rather than all of them. In short, income lives to its name by being the sum of the present values of the future incomes that can be earned from a particular building. As a result, it is extremely reliant on estimates, which may or may not be reliable depending on the information that is available as well as the person doing the estimates. For example, there is no simple and straightforward method for predicting how much a particular building can be expected to earn in rents, particularly not when those predictions are often supposed to go on in perpetuity.

As a result, home appraisers tend to rely on the incomes of similar buildings in similar situations, meaning that their estimates can be off when no such information is available to them. Similarly, discounting future values to their present equivalents is extremely unreliable because this is done using interest rates for all of the years between them, which is something that even entire teams composed of the best economists have problems doing, meaning that the home appraisers’ estimates are only as good as the people whose estimates that they are using. With that said, if the home appraiser can get accurate information for all of the factors used in the calculation, the income method can produce remarkably useful results.

Sales Comparison

The simplest and most straightforward way to figure out a home’s fair market value would be to put it up for sale since by definition, its sale price would be its fair market value. However, this is not a practical solution to the problem of home appraisal for obvious reasons, meaning that home appraisers have to resort to the next best thing when they use sales comparison for their home appraisals. In short, they take the sales prices fetched for similar homes in similar neighborhoods within the last six month for use as a starting point when they appraise homes. The closer that these homes and these neighborhoods are to the ones being appraised, the more reliable the results, which is why many home appraisers prefer to use homes from the same neighborhood whenever and wherever possible.

However, it should be noted that this is no more than a starting point since home appraisers will also change the estimates of a home’s value by noting differences between it and the homes that were chosen for comparison. Examples of such differences depend on the extent of the similarities between the home being appraised and the homes that were chosen for comparison, but can range from different sizes to a different number of bathrooms and bedrooms. Unfortunately, sales comparisons are influenced to a massive extent by trends in the real estate market, meaning that a home appraisal during a boom will be higher than a home appraisal during a bust, which is something that homeowners should take into consideration when deciding when to have their homes appraised.

Further Considerations

Ultimately, home appraisal is based on estimates, meaning that the outcome of a home appraisal is always uncertain, particularly since home appraisers have been known to blend elements of more than one of these methods so that one of them can step up whenever another one falters because of an incompatibility with the situation. Regardless, the best way forward for you is to cooperate with your home appraiser as much as possible so that they will have all of the information that they need to produce a fair and useful figure for your real estate and real estate-related transactions.