Real estate appraisers can use a number of techniques to determine the value of your home. Lenders order appraisals when you want to borrow money against your home, while local governments use appraisals to determine your property tax liability. Some appraisal techniques are more thorough than others, and this can have an impact on the appraised value of your home.
Cost Versus Sales
Conventional appraisals involve a licensed real estate appraiser visiting your home and conducting a detailed inspection of the interior and exterior. Appraisers take note of upgrades such as granite counters and problems such as leaky plumbing. After the inspection, the appraiser may use the cost approach to value your home. This involves calculating the cost of the raw land and the amount that it would cost to rebuild your home. Alternatively, the appraiser may look for similar, recently sold homes in your area and use the sale prices as the basis for your home's valuation. Some appraisers produce a report that includes both a cost value and a sales value, and your lender or the tax authorities can decide which value to use.
If you plan to use a house as an investment property, the appraiser may use an appraisal technique known as the income capitalization approach. The appraiser bases the appraisal on the rental income that you could generate from the home. If the area is swamped with rentals, you may have to cut the rent, which means a lower appraisal. If the demand for rentals outstrips the supply, you may get a higher-than-expected appraisal. The appraiser also inspects both the interior and exterior of the property to look for upgrades and issues that could affect your ability to rent the home.
Drive-by appraisals are a low-cost alternative to conventional appraisals. With this approach, a licensed appraiser drives into your neighborhood and conducts an exterior examination of your home. These appraisals are less reliable than full appraisals because no one looks inside your home. This could be good or bad depending on whether you've spent a lot of money on upgrades or allowed your house to fall into disrepair. A lender may order a drive-by appraisal if you want to refinance a home but have plenty of equity in it. If you have very little equity, a lender is more likely to order a full appraisal.
Automated Valuation Models
Automated valuation models are the least detailed and least expensive home appraisals. Real estate firms gather property tax data and information about recent home sales and store this information in a computer database. Property values are determined by entering physical addresses into the database and uncovering pricing information for similarly sized homes in the same area. AVMs aren't always reliable because property tax values are sometimes capped, which means the tax value bears little resemblance to the actual market value of a home. However, AVMs provide you with a rough guide for the value of your home. Prior to the housing market crash that began in 2007, lenders often used AVMS as a cheap alternative to full appraisals.