This question comes up more frequently with buyers especially now with so many changes to the way banks do business. In answer to this, a detailed description of appraiser’s methods is below. There are Three Approaches to Determining a Home’s Value:
This approach assumes that a potential purchaser would consider building a substitute residence that has the same utility and use as the subject property being appraised. The appraiser arrives at the indicated value of the property by estimating the reproduction cost of improvements, subtracting the amount of depreciation by all causes, and adding the estimated value of the site as if it were vacant. The appraiser estimates land value by analyzing comparable sized land sales.
This approach is an analysis of recent sales that are the most comparable to the subject property. An appraiser must analyze a minimum of three comparable sales that were settled or closed within the last 12 months. An appraiser must comment on sales that are more than six months old.
Normally this approach is not applicable to single-family properties. However, if a single family home is being utilized as an investment property, the appraiser must prepare a single-family comparable rental schedule (Form 1007) in addition to the appropriate appraisal report
The appraiser’s analysis must take into consideration all factors that have an impact on value, recognizing that a well-informed buyer will not pay more for this property than the price they would pay for a similar property of equal desirability and utility. To accomplish this, the appraiser must analyze all closed and settled sales, contract sales, and current listings of properties that are the most comparable to the subject property.
Because the appraiser’s estimate of market value is no better than the reliability of the comparable data that is utilized, the appraiser must exercise diligence to ensure that the comparable sales data is reliable. The appraiser must report each comparable sale on the appropriate appraisal report form and must report a minimum of three comparable sales as part of the sales comparison approach.
Each comparable sale that is utilized must be analyzed for differences and similarities between it and the property being appraised. The appraiser must make appropriate adjustments for location, terms, and conditions of the sale, date of sale, and physical characteristics. Specific guidelines have been set for adjustments regarding proximity to subject, date of sale, and net or gross adjustments:
Proximity to Subject: Sales should be located within one mile of the subject.
Date of Sale: Comparable sales should have closed within 12 months of an appraisal’s effective date.
Net & Gross Adjustments: Adjustments are changes in the value of a comparable property made when comparing the features of the comparable property to the subject property. A net adjustment is the positive or negative value assigned to each feature. The gross adjustment is the sum of those values for each property. The dollar amount of the net adjustments for each comparable sale should not exceed 15% of the sales price of the comparable. The dollar amount of the gross adjustment for each comparable sale should not exceed 25% of the sales price of the comparable.
Sales or Financing Concessions: The dollar amount of sales or financing concessions paid by the seller. Examples of sales or financing concessions include interest rate buydowns, loan discount points, loan origination fees, and closing costs customarily paid by the buyer. The appraiser must obtain this information from the individual who is a party to the concessions. The dollar amount of the concessions is adjusted negatively in the sales grid.
Because rural properties often are situated on large lots, and rural neighborhoods can be relatively underdeveloped, there may be a shortage or absence of recent comparable sales in the immediate vicinity of the subject property. This means that the appraiser will often need to select comparable sales that are located a considerable distance from the subject property.
In such cases, the appraiser must use his or her knowledge of the area and apply good judgment in selecting comparable sales that are the best indicators of value for the subject property. The appraiser should include an explanation in his or her report of why the particular comparables were selected in his or her analysis.