How to Interpret an Appraisal Report

Instructor: Donnie Plunkett

Donnie has been a licensed real estate broker for over 15 years. He earned his MBA at Rice University. He also holds the CCIM designation.

In this lesson, you will learn how to interpret a uniform residential appraisal report. You will see where an appraiser assigns a value to the home, the approaches that the appraiser used to reach that value, and the key areas to focus on when you review the report.

A home ready to be appraised
suburban_tract_house

Required by Lenders

Most residential real estate sales involve a lender, and this makes the appraisal a critical aspect of any sale. While the price the buyer and seller agreed to may be a good indicator of the home's value, this is not enough for the lender to rely upon. The lender is putting up a large sum of money and wants to make sure that the collateral (the house) is worth at least what the property is selling for. They do this by hiring a licensed appraiser to complete an appraisal report, or estimation of the current value, on the home.

Appraisal Methods

An appraiser uses three methods in order to come up with the value of the home: comparable sales, cost approach, and income approach. The appraisal report itself is mostly focused on comparable sales, and that is the method that most appraisals use when coming up with an opinion of market value.

Basic Appraisal Information

The first page of the appraisal report gives basic information about the home such as the property address, the parcel number, and the legal description. It also states the purpose of the inspection: typically for a home purchase or a refinance. If there is a purchase contract, it lists the contract price and date of contract. The neighborhood is also analyzed. The most important fields for the lender in this section would include the positive or negative trends in property values, the demand/supply mix, and the amount of marketing time it takes to sell homes in the neighborhood.

There is also a section describing the improvements (to the structure itself), including the foundation, the exterior, and the interior. Lenders do not just ask the appraiser to check off boxes for things like whether the home has a concrete slab; they also want additional insight by having the appraiser describe things in sentence form, such as the condition of the property, adverse conditions, neighborhood conformity, and special features. Some of the best information about a home's value can be gained by reading an appraiser's descriptions in his or her own words. Another key piece of this section is the year the home was built and the effective age. Sometimes a well-maintained or renovated home may be 40 or 50 years old, but still have a long life ahead.

Property Information and Comparable Sales

The second page of the appraisal report is very useful and is where most lenders, real estate brokers, and others immediately turn. On this page, the subject property (the property being sold or refinanced) has its information entered in the first column. This is everything from the gross living area in square feet to the number of bedrooms to whether the home has a view. There, comparable sales (also called 'comps') are identified; ideally these are homes within the same neighborhood or within a mile of the property and with at least somewhat similar features. Information about these homes is entered into the next three columns, then adjusted. This is in order to make an apples-to-apples comparison. For instance, think about a neighborhood where homes sell for around $100 per square foot. A home that is 200 square feet smaller than the subject home might need to have $20,000 added to its value in order to make it comparable. These types of adjustments can be made for any differences.

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