7 Situations When You’ll Need An Appraisal

Last updated on April 11th, 2024 at 03:11 am

If you’re using a lender to purchase a home or property, they are most likely going to require that a home appraisal be done prior to closing.

Or, maybe you’re just curious what your home would sell for in today’s market.

But do you really need an appraisal?

After all, you have a pretty good idea of what your home is worth, right?

Well, it’s not just about putting a price tag on a house.

Whether you’re buying, selling, refinancing, or just curious about the worth of your property, appraisals can help you make informed financial decisions, and can potentially save (or make) you thousands in the long run.

Don’t risk leaving money on the table simply to avoid the cost of an appraisal.

Let’s get down to a few of the most common situations when you’ll absolutely want to have an accurate appraisal.

When a property is being financed with a mortgage, lenders will require an appraisal to determine the property’s current market value. They need to make sure it meets their lending criteria, and that the property has value.

The cost to buy a home is significant.

Lenders want to make sure they can recoup the amount they’re loaning you, should you decide to stop paying the bill! 

The appraisal serves to protect all parties in the transaction with an unbiased, impartial opinion based on a number of factors.

Having an appraisal done typically requires an interior walk through of the home as well as exterior observations.

An exterior or “drive-by” appraisal may also be sufficient depending on certain factors determined by the lender.

Potential buyers and sellers may want to have an appraisal done prior to listing a home in order to get a general idea of what they can expect the home to sell for.

Having an appraisal not only protects buyers from over paying for a home, but can also be extremely helpful for sellers who are listing their property without the help of a real estate agent.

I’ve seen countless situations where home sellers claim to “know” the market, only to find out later on they left thousands of dollars on the table.

Don’t let this be you.

In other scenarios, I’ve seen sellers asking way too much, which leads to a “stale” listing, extended marketing time, and ultimately a price reduction that’s more consistent with what the current market says.

Investing a couple hundred dollars on an appraisal is well worth the cost to ensure you’re asking a fair price.

Pro Tip: It’s always a good idea to have an accurate estimate of your homes value prior to listing it.

Your real estate agent may also be able to assist in estimating value and creating a listing strategy. However, the agents Comparative Market Analysis will not be as in depth as a professional appraisal.

Lenders will not accept this type of valuation for lending purposes.

Estate appraisals can be used to establish the value of real estate properties for estate tax purposes or for use in divorce proceedings.

In divorce proceedings, the home can be a significant asset shared between both spouses.

Whether you sell the home, refinance to one owner, or divide the proceeds, having an accurate estimate of its worth is crucial in making these important decisions.

All townships and cities periodically conduct property tax re-assessments. Many times, this results in increasing a property’s assessed value (i.e. tax burden) over time to reflect market appreciation.

Having a professional appraisal done can provide you with support for your claims when challenging the assessment.

In my experience, attempting to challenge your assessment without an appraisal to back it up has a somewhat low success rate, but this depends on your specific area.

The tax assessor is more likely to believe the unbiased opinion of an appraiser vs. the homeowner who wants to save some money on their tax bill.

Property owners may need appraisals to ensure their insurance coverage accurately reflects the property’s value. This can be crucial in the event of damage or loss.

Insurance companies often rely on other factors to determine a coverage amount, including the purchase price, construction costs, and other information you provide to them.

However, there are situations where an appraisal or evaluation may become relevant for homeowners insurance.

Homeowners or property investors may seek the advice of an appraiser to understand the impact a particular renovation will have on their property value, or perhaps what kind of return they might expect to receive on an investment property.

This can be a key factor in determining whether to hold, rent, or sell a property at a given time.

Appraisers are uniquely qualified to extract these types of specific estimates from the market. It’s never a great idea to “wing it” when you’ve got tens of thousands of dollars invested into a particular home or project.

Businesses may use appraisals to determine the value of their real estate assets for accounting, financial reporting, or strategic decision-making.

For Asset Management purposes, the appraiser may employ additional research to analyze operating incomes, capitalization rates, cash flow analysis, and market conditions.

RELATED: COMMON APPRAISAL QUESTIONS

Appraisers rely on three fundamental approaches to value, each offering a different perspective on market data and its indication of value.

Depending on your situation, the appraiser will use one, two, or all three of these methods to support their value determination:

This is the most common approach used for residential properties. Appraisers compare the property being appraised to similar properties that have recently sold in the same area.

By analyzing similar and recent sales, they can estimate the subject property’s value range. They take into account factors such as size, location, condition, quality, and other features to make adjustments and arrive at a final value estimate.

The income approach is primarily used for income-generating properties, such as rental properties or commercial buildings. Appraisers estimate the property’s value based on the potential income it’s likely to generate.

They consider factors like rental income, operating expenses, and capitalization rates to arrive at a value. This approach can lend support to the Sales Comparison Approach, or can often times be more reliable for properties with a solid history of rental income.

The cost approach is commonly used for new homes, properties with unique characteristics, or other properties not typically bought or sold in the market.

It involves estimating the cost to replace or reproduce the property with an equivalent one. This includes the cost of land and the cost of constructing the building, minus any depreciation.

This approach is typically not as accurate for older homes as formulating an exact depreciation amount can be more difficult.

In all of these scenarios, an appraisal would provide an unbiased and professional opinion of a property’s value. This can be hugely beneficial in making informed financial, legal, and investment decisions.

Make sure the appraiser you hire is familiar with the type of property being appraised, as well as the geographical area of the property.

Certain areas have market nuances that an outsider may not be aware of.

The appraiser will determine which methods and approaches should be used to determine the most accurate value for your property.

This ensures an accurate and fair transaction that protects all parties involved.