Appraisals Explained

Residential appraisals are a key component of the transaction whenever you’re buying a home, refinancing your home, or selling your home to anyone who needs a mortgage.

 

For example, in the midst of a purchase-and-sale transaction, the seller will need to order an appraisal to determine if the sale price is fair given the property’s condition, location, and amenities.

 

On the other hand, if you’re buying a property or refinancing your home, then the lending institution will order an appraisal to ensure that they do not lend more money than the property is worth.

 

The appraisal process for residential properties is fairly standard across the board, regardless of the type of appraisal service needed. First, the appraiser will conduct a thorough inspection of the home’s interior and exterior, citing any conditions that would impact the property’s value, such as newly renovated fixtures or needed repairs.

 

The appraiser will also measure the home’s square footage, taking into account the number of bedrooms and bathrooms, as well as the functionality of the floor plans. Aside from the physical inspection, a considerable amount of weight goes into data analysis, market trends, and the direct-comparison approach, wherein the appraiser analyzes recent and similar sales (i.e., “comparables”) available in the area to determine the market value, with the help of proven adjustments.

 

That said, if requested by the bank/lending institution, the cost approach might also be used. In this approach, the property value is determined by adding up the value of every individual feature of the home, minus depreciation.

 

Once the physical inspection, comparables, and calculations are complete, the appraiser will write a report containing the following necessary elements:

 

• Photos of the home’s front, back, and street

• A sketch of the property’s exterior

• A street map of the property and its location

• The square footage calculation

• Photos of the front exterior of the comparables used

• Other relevant information, including market research, public land records, public tax records, etc.

Luxury home appraisals happen for two reasons:

1. The lending institution will order one on behalf of the buyer or refinancer to verify the property’s worth.

2. The seller will order one to justify a property’s sale price within a purchase-and-sale agreement (see presale appraisals).

 

Luxury homes are often built with premium materials, feature a greater square footage than standard residential homes, and are located in prime areas with beautiful surroundings and views. As such, waterfront homes usually fall into this category. Moreover, these homes are typically decked out with many luxurious amenities such as spa bathrooms, game and theatre rooms, sculpted lots, outdoor kitchens and swimming pools.

 

Luxury homes are much more difficult to appraise than standard residential homes. Extra knowledge, competence, and time are required to accurately determine the property’s market value.

In order to approve financing for new-construction homes, lending institutions will order an appraisal to accurately project the property’s “as-completed” value. That means that the appraiser is not working with an existing home, but completing an appraisal based on the property’s blueprints, specifications sheets, plot plan, cost-breakdown list, etc. The appraisal establishes what the property would be worth if it was fully built today.

 

Typically, the financing for new-construction homes isn’t a one-and-done deal. As the home is being built, the appraiser provides progress reports at varying milestone of the home’s construction to help with financing draws.

 

It is important that the details provided to the appraiser are as accurate as possible. If there are substantial changes made it may impact the final appraisal value of the property.

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You can submit details about your new construction home to us by using the form found here.

When a buyer is purchasing a new single-family home, and is planning to do renovations that will raise the property’s value, then they might apply for “purchase plus” financing. This type of loan can be used for many types of renovations, from fixing a roof and finishing a basement to installing new kitchen cabinetry. That said, lending institutions will want to ensure that these types of improvements will actually add value to the home’s market value. The market value does not necessarily increase directly with the amount spent on construction.

 

Purchase-plus improvement appraisals also involve progress inspection reports to verify that the work is being completed in accordance with the lender agreement.

Progress inspection (also called “draw inspection” reports) are for new-construction of single-family homes and renovations. When a lending institution has approved financing – based on a new construction appraisal – to build a new home or perform major renovations, it won’t release all the funds right away. Rather, funds will be released based on an estimated completion percentage given by an appraiser. Each time the bank releases funds, it is known as a “draw”.

 

Progress reports can be ordered as a standalone service. However, they are requested as additions to appraisals ordered for construction or renovation. The appraiser will conduct an inspection, cross-referencing the progress with the proposed plans. Afterwards, the appraiser will draft a report detailing the project’s completion percentages.

Residential land appraisals (also known as ‘vacant lot appraisals’) are ordered to determine the value of a property that is vacant or with improvements at the end of their economic life.

 

The appraiser will not only schedule an inspection to look at the land parcel and analyze its features, but they’ll also use sales comparables to see at what price other land in the area sold. In some cases, it might be hard to find comparables, but the appraiser will do their best to consider the subject’s  unique location, the shape and size of the land, as well as key utilities like water, electricity, sewers, etc.

Lenders require an appraisal be completed before offering a second mortgage. A second mortgage can be obtained in addition to a first mortgage when a homeowner needs to borrow additional funds. The second mortgage is a separate loan, with its own interest rate and terms, and is secured by the same property as the first mortgage. The second mortgage lender has a claim on the property after the first mortgage lender, in the event of default or foreclosure.

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Second mortgages are used for home renovations, debt consolidation, and financing major purchases. The funds from a second mortgage can be disbursed in a lump sum or as a line of credit, depending on the lender and the type of loan.

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It's important to note that taking out a second mortgage increases the overall debt load on a property, and it can be riskier than a first mortgage because the second mortgage lender is in a junior position in case of default or foreclosure. Additionally, the interest rate on a second mortgage may be higher than a first mortgage due to the increased risk to the lender.

We offer appraisals for multifamily homes containing 2-4 units. See Commercial Appraisals for 4+ units. Appraising multifamily properties with less than 4 units can be similar to appraising a single-family home, but with some additional considerations, including:

1. Appraisers will access all the rental units and observe physical characteristics. 

2. Consider rental income: Unlike a single-family home, a small multifamily property generates rental income. Appraisers will consider the rental income from the property when determining its value, taking into account factors such as the rental amount, lease terms, and occupancy rates.

Many lending institutions typically require market rent reports whenever a buyer purchases more than one property. These reports give banks insight into how much extra income the buyer applicant will make from the extra properties. Because people have falsified leases in the past, market rent reports help banks to ensure that borrowers can reliably pay their debt.

 

Market rent reports not only state the rent that the property owner receives, but the rental value must be supported by comparables. Market rent reports can be completed without a visit if sufficient pictures and information is available. The appraiser uses their internal database to search for other similar rental units. With the comparables found, adjustments are made for differences and an estimated market rental rate for the property is concluded. We also rely on data found online in order to use the direct-comparison approach.

Sometimes rush (or “last minute”) appraisals are needed to hit a tight closing deadline. Otherwise, you might incur extra lawyer fees or lose your earnest money deposit from a purchase-and-sale agreement.

 

While many firms don’t have the capacity to do rush appraisals, you can always call Modern Appraisals to enquire as to our availability.

 

We offer this service for all the different appraisal types.