How an Appraisal Report is Compiled

Each appraisal report contains a variety of figures, property details and sales comparisons. This includes current specs of the subject property, and a side-by-side comparison of three similar properties. The report will provide an estimate of the average sales time for the property, the type of area the home is in (stand alone acreage, development, etc.). The appraiser may point out details about the subject property that are detrimental to its value, i.e. obstructed access to the home, and highlight any apparent characteristic flaws, such as a crumbling foundation. The appraiser also evaluates the overall market in the area, detailing the volume of transactions and average DOM (days on market) and home values for the neighborhood.

There are two appraisal methods used for residential properties. The first is known as the cost approach. Formerly referred to as the summation approach, this is applied to newly built properties, where the costs to build are known. The figure given is an estimate of how much it would cost to replace the structure if it were destroyed. It’s calculated as a hybrid of the cost and sales comparison approaches i.e., the replacement cost of a home is determined by adding the labor, material, and other costs, with consideration for land values and depreciation.

The second approach, a sales comparison, determines the home’s market value by comparing it to similar properties recently sold in the area. As no two properties are ever alike, the appraiser must make paperwork adjustments to the comps to make their features more in sync with the subject property. The resulting figure shows what each comp would have sold for if it had the same specs as the subject.

What’s Included in an Appraisal Report

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An appraisal is a survey of a home performed by a licensed, independent professional to determine the home’s market value. The appraiser documents the property’s interior and exterior condition, from the layout, amenities and features, modernization updates, and the overall construction quality.

Appraisals typically happen for one of two reasons: a lender orders one prior to approving a loan for a home buyer, or the property’s current owner orders one to assess its value before putting it on the market. The Equal Credit Opportunity Act mandates that your lender provide you with a copy of the appraisal report upon your written request.

The appraiser estimates the GLA (gross living area) in square footage by measuring the exterior of the home. Finished basements and non-living areas such as garages aren’t included in the GLA estimate, but are documented and considered in value separately. This information will guide the appraiser throughout the comparison and valuation process.

In most cases, the appraiser only considers permanent structures and real property. As most small sheds and above-ground swimming pools are not permanent fixtures, they are usually excluded in the valuation. However, the specific installation process and local custom, may allow an above ground pool or small shed to be considered as part of the real property.

Appraisals are vital reports in the real estate market, because they are relevant to buyers, sellers, and lenders. The value that an appraiser determines in their appraisal report ultimately sets the guideline for what a lender is likely willing to lend to a potential buyer. Given that is such an important element of any real estate transaction, it is useful to know what a typical appraisal report contains. Here are more details about the contents of an appraisal report.

Elements to be included in the Appraisal Report

In the Appraisal Report, the appraiser documents:

The property’s interior and exterior condition, from the layout, amenities and features, modernization updates, and the overall construction quality.
An estimate of the GLA (gross living area) in square footage by measuring the exterior of the home.
Living areas only, and excludes finished basements and non-living areas such as garages, which are instead documented and considered in value separately.

The information in an Appraisal Report will guide the appraiser throughout the comparison and valuation process. In most cases, the appraiser only considers permanent structures and real property. As most small sheds and above-ground swimming pools are not permanent fixtures, they are usually excluded from the valuation as well.

Two Appraisal Methods

There are two appraisal methods used for residential properties, the cost approach and sales comparison. The former is applied to newly built properties, where the costs to build are known. The figure given is an estimate of how much it would cost to replace the structure if it were destroyed. A sales comparison determines the home’s market value by comparing it to similar properties recently sold in the area. As no two properties are ever alike, the appraiser must make paperwork adjustments to the comps (compared property) to make their features more in sync with the subject property. The resulting figures show what each comp would have sold for if it had the same specs as the subject.

How Long is an Appraisal Good For?

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An appraisal report details several crucial bits of figures concerning prices and vales. One number you likely won’t see is an expiration date for the appraisal itself. Most loan agreements don’t specify the timeframe for when an appraisal is considered expired.

Different lenders have different time frames before they consider an appraisal expired, typically spanning between 60-90 days, never exceeding 180 days (6 months). Lenders want to have a current snapshot of the market surrounding the appraised home, which is why they require comparable sales figures (or “comps”) that are no more than six months past, meaning the appraisal should be no more than six months old. Most appraisers and lenders agree six months is the maximum amount of time that an appraisal is considered valid, known as the “term of validity.”

Lenders want an appraisal to use comps as close to the appraised home as possible, with few adjustments needed to match them up. Within six months is the preferred window, but they may stretch to a year if a sufficient number of newer comps are not available.

Expired appraisals can be recertified for another 90 days. Recertification is the appraiser confirming that the values are still accurate based on comparables in the area. Many times, if new information isn’t available, they will use the same comparables. Most appraisers charge a reduced fee for recertified appraisals.

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By Derren Peters

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How an Appraisal Report is Compiled