Appraisal Methods

An appraisal is an opinion of value or the act or process of estimating value.

This opinion or estimate is derived by using three common approaches, all derived from the market. When you receive a copy of your appraisal you will see these methods referenced in your appraisal.

Residential Appraisals will use the Cost Approach and the Comparison Approach to represent the value of your home to the bank or lender. Lenders will generally take the Comparison approach as the value of your home in approving your mortgage.

In plain English:

• Cost Approach
  This uses construction costs in your area to determine what it would cost to build your house based on a price per square foot plus the price of the lot
  
  
• Comparison Approach
  This approach uses the prices of homes that have sold close to your home and have similar features and amenities. A home farther than one mile from your house must include a reason for using that home as a comparison.
  

• Cost Approach to value is what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the Physical Deterioration, the Functional Obsolescence and the Economic Obsolescence. The remainder is added to the Land Value.
  
  
• Comparison Approach to value makes use of other "bench mark" properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property.
  
  
• Income Approach to value is of primary importance in ascertaining the value of income producing properties and has little weight in residential type properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces. Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated.
  

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