A Homeowners Guide To The Different Types of Appraisals

Welcome to my overview on the different types of appraisals used in real estate.

Read through for an understanding of why real estate appraisals come in various forms and styles – each intended to serve a specific purpose in the process of valuing a property.

Full appraisals are one of the most comprehensive and most common types of appraisals, or valuations. 

A full appraisal involves a licensed or certified appraiser completing an inspection of the property, looking at both the interior and exterior.

They will assess the condition of the home, its quality, features, and any recent updates or renovations. The appraiser will also consider the property’s location, its proximity to amenities, and local market trends.

This information is then compiled into a detailed report, usually about 20-30 pages in length, providing an accurate estimate of the property’s current market value.

While some types of appraisals are used just for homeowners or investors, full appraisals are often required by lenders before approving a mortgage loan.

This is to make sure the property’s value adequately covers the amount of money being loaned.

Exterior only appraisals, also known as “drive-by appraisals,” are slightly less comprehensive than full appraisals but still offer an in depth look to determine a property’s value.

In this type of appraisal, the appraiser does not enter the home.

Instead, they view the property’s condition and estimate its value based on the exterior appearance, as well as legal descriptions, public records, and any other relevant information available.

This method is somewhat quicker and less invasive, making it a preferred choice for situations where a full appraisal is not deemed necessary.

Although less detailed, exterior only appraisals are still useful for refinancing applications and home equity loans where a full inspection of the interior condition is not deemed necessary.

Desktop or hybrid appraisals combine elements of both full and exterior-only appraisals, utilizing technology and public records to estimate a property’s value without the appraiser physically visiting the site.

This approach will involve the appraiser reviewing digital documentation, photographs, and other data provided by the homeowner, or sometimes, by a third party.

Desktop appraisals are gaining popularity for being less costly and with a faster turnaround time, making them an attractive option in scenarios where a quick valuation is necessary.

However, they might not be as precise as full appraisals due to the lack of an on-site inspection. Appraisers must rely on information gathered by another party, which isn’t always the most credible.

These appraisals are commonly used for loan refinancing or home equity lines of credit when the risk to the lender is somewhat low.

Rental analysis appraisals are focused specifically on evaluating a property’s probable or existing income-generating capabilities.

This type of appraisal takes into account not only the physical condition and location of the property but also current trends in rental prices for similar properties in the area.

Other data considered includes occupancy rates, operating expenses, and any legal or zoning issues that could impact its rental potential.

The outcome is an estimate of the property’s income-producing potential, which is helpful for investors considering purchasing rental properties or landlords looking to refinance an existing rental property.

A rental analysis is sometimes included as an add-on to a full appraisal report for investment properties.

 

A Broker Price Opinion (BPO) is an analysis performed by a licensed real estate broker or agent to determine the potential selling price of a property.

Unlike traditional appraisals, a BPO is less formal and usually less expensive. 

The broker examines comparable sales in the area, current market conditions, and the condition of the property to provide an estimated value.

While not as comprehensive as a full appraisal, BPOs are valuable for some purposes like pre-listing a property, estimating the value of an investment property, or even for refinancing or lending in situations prior to requesting a full appraisal.

BPO’s are not allowed in every state, and are generally considered to be an “unofficial” estimate of a home’s value.

A Comparative Market Analysis (CMA) is another tool used by real estate agents to estimate a home’s value by comparing it to similar properties that have recently sold.

This analysis involves a comparison of features and differences between the subject property and the comparables, including size, location, amenities, and condition.

A CMA can provide insight into the local real estate market and helps home sellers determine a list price. CMA’s can also provide buyers with data to make a fair offer price.

Although not as formal as an appraisal, a CMA can be useful in guiding real estate transactions by providing an educated estimate of property value. Lenders will not generally accept a CMA as part of a lending transaction.

An Automated Valuation Model (AVM) is generated value estimate based on advanced algorithms and large datasets.

This is a computer-based estimate that pulls data from various sources, including public property records, recent sales data, price trends, and market activities.

Lenders may use an AVM to get a general sense of the home’s value range. Most of us have also used popular AVM tools like Zillow or Redfin to get an estimated value of our home.

AVMs are often used by financial institutions, real estate professionals, and online real estate platforms like Zillow or Redfin, to provide instant property value estimates.

Although these can be convenient and efficient, the accuracy of AVMs is questionable at best, and can vary based on the quality of the data used.

AVM’s are most often considered a preliminary valuation tool rather than an actual appraisal.

Land appraisals are more specialized evaluations, commonly used to determine the value of a piece of undeveloped, or vacant, land. 

Unlike residential or commercial property appraisals, which include structures and improvements, land appraisals focus on the value of the land itself. 

Factors that can influence a land appraisal include location, zoning regulations, acreage, the slope or grade, accessibility to utilities, water rights, and potential for development.

Land appraisals are often needed for the same purposes as property appraisals, including for  buying and selling land, determining property taxes, and other lending situations. 

Commercial appraisals are used to determine the value of properties used for business purposes, such as office buildings, retail stores, industrial sites, and large housing complexes.

Commercial appraisers take into account a wide range of factors including location, size, condition, income potential, and current market trends in commercial real estate. 

Due to the complex nature of commercial properties, these are conducted by appraisers who specialize in the type of commercial real estate being valued. 

Similar methodologies are used, including the Cost Approach, Sales Comparison Approach, and Income Capitalization Approach to provide an accurate value.

A license to perform commercial appraisals requires extensive additional education and training.

When it comes down to finding the final number or value range that defines what a property is worth, appraisers generally rely on three main approaches: The Cost Approach, Sales Comparison Approach, and Income Approach.

Each of these brings its own set of factors to analyze and consider, but the primary goal for all is always to determine a credible value point or range. The appraiser will use their judgment to determine which approach is most reliable and which should be included within the appraisal.

To use the cost Approach effectively, the appraiser estimates what it would cost to build something similar today. This includes building costs, the land value, and factors in the amount of depreciation. 

The cost approach is considered most reliable for newer homes, as the cost to re-construct older homes or to estimate their depreciation can be more unreliable.

The Income Approach method looks at a property through the lens of how much cash flow potential a property has.

It answers the question: “If I turned this home into a rental property, what kind of income could it bring in?” 

Rental property I previously appraised

For this, the process includes reviewing current rental rates, occupancy levels, and operating expenses to develop a multiplier which can then be applied to the property being appraised. 

Sounds complicated, right?

It can be.  

This approach is a go-to for investment properties or for those who envision turning a fixer-upper into the next in-demand Airbnb. 

The Sales Comparison Approach is the most commonly used for residential properties and is considered the most reliable for most existing homes.

This method looks at recent sales of similar properties in the area. Things like location, size, condition, and features are also taken into account.

So just as you compare all the options for that new car you want, this approach compares a property to others that have recently sold to estimate a market value.

Appraisals serve as a check or balance in a variety of scenarios for making informed financial decisions. 

Although they are most commonly needed during the process of buying or selling a property, there are plenty of other situations when you might need to have your home appraised. 

Before you commit to purchasing a home, you want to know that the price aligns with its actual value. Part of the home buying process will include the lender ordering an appraisal of the home.

An appraisal can protect you from overpaying for a property and give you added security that  you’re making a wise investment.

When building a home, an appraisal is typically required for securing a construction loan. 

Lenders need to know that the completed home will be worth at least as much as the loan amount.

The appraisal is done by reviewing plans, the materials being used, and the location of the build, among other factors.

When selling a home, an appraisal can give you a realistic view of what your home is likely to sell for in the current market. This allows you to set a competitive price that attracts buyers without leaving money on the table.

An appraisal can also be a powerful tool in negotiations, providing concrete data to support your asking price.

Refinancing your home can potentially save you money in the long run, whether by lowering your mortgage payments, shortening the term of your loan, or tapping into your home’s equity.

An appraisal helps the lender confirm the current market value of your property, which assists them in determining how much you’re eligible to borrow.

The amount of your loan will be based on a percentage of the home’s appraised value.

Homeowners insurance is always necessary for protecting your investment in case of disasters or unexpected events. But how do you know the amount of coverage you need?

An appraisal can help determine the replacement cost of your home, ensuring that you have adequate coverage and peace of mind if something unforeseen happens.

If you feel your property is assessed too high by the tax authority, an appraisal might be your best line of defense.

By presenting a current and professional appraisal to the assessor, you can make a strong case for reducing your property taxes.

This can lead to substantial savings, especially in areas where property values have recently declined.

RELATED: DOES AN APPRAISAL INCREASE MY PROPERTY TAXES?

For estates or divorce settlements, an accurate appraisal of property value is often used to provide a fair distribution of assets. 

When estates must be divided among heirs, the appraisal provides a basis for negotiating and decision making. 

This can prevent future disputes over assets as families work towards a smooth resolution. 

None of us want to make a bad investment decision. Considering the vast amount of people that invest in real estate as a means of building wealth, understanding a home’s true value is crucial.

This requires a comprehensive understanding of the market and how much buyers are likely to pay for a home once it’s renovated, rented, or whatever other purpose you have in mind. 

An accurate appraisal can highlight opportunities and minimize risks for investors.

Real estate appraisals are used for a wide range of financial decisions and transactions. 

Now that you’ve got a sense of all the various types of appraisals and their uses in different situations, it makes sense that there exists such a wide range of forms, purposes, and complexity of appraisals.  

Whether it’s for taxes, legal matters, or investment plans, getting an accurate appraisal is vital, and almost always worth the investment. 

Appraisals exist to promote public trust and fairness within the real estate market.

Next time you’re making plans for your property, you’ll know what type of appraisal suits your needs best.