Lenders require appraisals so they know they're not financing more than a home is worth.
Appraisals are the most reliable method of establishing a home's value. Whether you're taking a second mortgage and your lender wants to establish the equity in your home, or you're buying and you want to make sure you’re not overpaying, appraisals are typically part of the process. Appraisals are done in few different ways.
Sales Comparison Analysis
A cost approach appraisal estimates what it would cost you – or your insurer – to replace your home in its exact location if it were destroyed. It can also help establish the value of a very unique home when reasonable comparable sales can't be found. This method usually has three components: the value of
the land, local construction costs for both labor and supplies, and – if the home isn't new – depreciation. The value of the land and the costs of rebuilding are added together, then a percentage is deducted for aging and loss of value. Some appraisers may deduct depreciation from just the rebuilding costs, then add in the value of the land.
The income method of appraising is usually more appropriate if you're buying property as an investment, not to live there. This might be the case if you're planning to rent the home out. This analysis factors in the income the property can be expected to produce for you, less your costs of maintaining it. This method is often used to establish values for tax assessments.
Appraisal Vs. Other Methods