Whether you are the buyer or the seller in a real estate transaction, the appraisal is one of the most important steps in the process. The appraisal determines the market value of the home, so if the appraised value of the home comes in low, the entire deal may fall apart. The appraised value of the home also comes into play if you are refinancing your home or applying for an equity loan. Understanding appraisals and the process sets your expectations as the appraiser comes out to assess the value of the home.

1. Value in Time

The first thing you need to understand about appraisals is that the appraiser is determining the value of your home in the here and now. It doesn’t matter what it was worth last week, last month or last year. It is similar to taking a photo of your home as it is today. The appraiser is taking a photo of the value of the property as it stands today, which is based on numerous factors. These factors include a review of your home but also include a lot of behind the scenes research.

2. Behind the Scenes Work

Homebuyers, sellers and homeowners often have misconceptions about what conducting an appraisal entails. While the majority of appraisers will come to your home, take some photos and walk around the property, this is not the sole way they calculate your home’s worth. The real work begins back at the appraiser’s office where they conduct in-depth research to find comparable homes, which are:

• The same type (single-family, condo, townhouse, etc.)
• With the same or similar square footage
• That possess the same or similar amenities
• Located within the same neighborhood, nearby neighborhoods or within one to five miles of each other (depending on the area being rural or urban)
• Currently listed for sale
• That have recently sold (usually within a few months to a year)

3. It’s a Professional Opinion

Appraising a home is not like mixing up a chemistry science experiment. A professional appraiser uses the information that is available to them to state a professional opinion on the current value of the home. There is not, however, an equation or formula that spits out a definitive appraisal value.

If you or one of the parties involved in the real estate transaction does not agree with the appraised value you can obtain a second opinion. But keep in mind each appraisal costs money.

4. Each Appraisal has a Purpose

People, mortgage companies and other agencies hire appraisers for a myriad of different reasons. The most popular reasons include:

• Buying/selling a home
• Refinancing a home
• Establishing an equity loan/equity line of credit on the home
• Requesting to drop the private mortgage insurance (PMI) on the property
• Property tax purposes

5. Appraisals are Not CMAs

CMA stands for comparative market analysis. A professional appraiser does not conduct CMAs but real estate agents do. A CMA cannot be used by lenders to make a lending decision. It’s purpose is to give the seller an approximate value the home should sell for within a set period of time, typically 30 to 60 days. But this too may depend on the current housing market.

Appraisals are an integral part of most real estate transactions so it’s important to be familiar with the process, understanding  how the value of a home is calculated and determined.