When buying or selling a house, the home typically goes through an appraisal to determine the value of the property. There are 3 types of property appraisals that happen when closing on escrow:
- Cost Approach
- Sales Comparison Approach
- Income Capitalization Approach.
While a home appraisal is not necessarily required for buying or selling a home, it is a very common practice and this step is more often than not included in the home buying process. An appraiser will observe and identify unique features of the home to calculate the property’s value.
There are several different factors that contribute to the value of a home and therefore impact the appraisal. Some of these factors are in the seller’s control, and some are not. Little details like a well-maintained yard, fresh coat of paint, and tidy interior can make a big impact on the appraisal.
External factors like proximity to interstate traffic or local light pollution can also impact your appraisal, but those factors will also be weighed against the other homes selling in your local area.
The different types of home appraisals focus on different elements of the market and have different methods of determining a value.
1. Cost Approach
The cost approach, as you may imagine, focuses on the cost of the property. The appraiser adds both the cost of the land and the construction cost, then subtracts any depreciation from the total value. Seeing as homes depreciate in value as they get older, this method is most accurate for newer homes. The cost approach can be thought of in two ways–what would the cost be to replicate this home, or what would the cost be to replace everything in this home?
2. Sales Comparison Approach
The sales comparison approach–you guessed it–compares the sale price of homes. Specifically, this process compares the value of one home to the sale price of similar homes in the area or in a similar market. This approach takes into account any unique characteristics of your home that might stand out amongst other recently sold homes, and also takes into account any common property features for a specific local area.
The nature of the sales comparison approach examining similar houses selling in similar markets leads this method to be generally the most accurate form of appraisal. The recency aspect of the market produces accurate values for the current selling period. And, the comparison of local sales contributes to an accurate appraisal value, as homes in the same area will have the same location factors, such as local school districts and access to nearby parks and walking trails.
3. Income Capitalization Approach
The income capitalization approach is typically reserved for commercial properties or residential properties that will produce income, such as apartment complexes, rather than residential homes. In order to determine an appraisal value, this process examines the potential for income on a specified property and calculates the value of that property based on market conditions.
This approach relies heavily on models and calculations to predict the future income for the property. Therefore, the income capitalization approach is more intricate, less accurate, and harder to calculate than the other two appraisal methods, but extremely useful for predicting a value based on potential income.
Getting Your Home Appraised
It’s important to remember that any new upgrades, renovations, or additions to the property can have a big impact on the appraisal value and can help your home stand out from similar competing homes. Simple fixes like a fresh coat of paint or a new mailbox can also make your home that much more appealing, and that much more valuable.
However, it is also possible that your home appraises for less than what you anticipated. Among a few different options, you can request a second appraisal and gather similar recently sold sales prices from previous listings in an attempt to justify your sale price. Do your research ahead of time and be aware of all the market conditions that could potentially impact your home’s value in order to be prepared for your appraisal.
For more help with getting your home appraised, reach out to New Venture Escrow with any questions or concerns about the closing process. Our agents are here to offer their expertise and guide you through a smooth transition.
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