Types of appraisals and how they affect today’s market

Appraisers are working harder than ever before in today’s seller market. Homes across the US are receiving dozens of offers and buyers are pulling out all the stops to get their offer to the top of the stack. This is creating the buzz of people wondering, how are these offers being covered against the appraisal? The short - they aren’t. Buyers are bringing the cash necessary to cover the difference in the appraisals giving those buyers with the liquid cash available great leverage in today’s market.

So how much will a bank lend and how do appraisers value the cost of your home? For most single family residences, the appraiser is using a cost approach method in valuing your home. Taking into account the square footage, total bedrooms and baths, overall condition of the home as well as what houses with similar metrics have sold for recently in the area. The appraisal is used to mitigate lending risk for the lending institution. The bank wants to ensure their investment is secure and if the loan defaults, they can make back their money during a sale. In most instances, the amount a lending institution will cover for your loan will be your office price, or the appraisal price - whichever is less.

So what else do appraisers look for in determining value? Sure, the beds and baths are important, but there has to be more, right? Appraisers will take into account rental income available in a property such as an in-law apartment or if you have a truly unique property with no comps in the area, they would likely use a replacement cost approach to ensure a fair appraisal is provided. This is often known as the substitution method - if I rebuilt this house exactly as it stands, how much would that cost. Appraisers also take into account demand in your area for homes, utility or ability to use the home for a buyer's intended purpose dependent upon any zoning restrictions, scarcity or how many homes are available in the area, and transferability - is the title a marketable one?

Given every house is different, the appraiser will determine the best approach to use to get you the fairest market appraisal available. Regardless, the bank is going to use this information to protect the money they are lending for your purchase and you want to ensure if you are going the route of offering more than a home may be worth, you have the cash to bring to closing to finish the deal.