How Appraisers Determine Value
Once a buyer and seller agree on a sales price, the contract is then sent to the lender for the loan approval process. One of the first things the lender will do is to order an independent appraisal. The appraiser will use local data to determine a value for the subject property.
The main purpose is to protect the lender in the event of borrower default by ensuring that the property is actually worth what the buyer is willing to pay, but this also protects the buyer from over-paying as well.
The process appraiser use to determine value is relatively simple. They start by searching for local comparable properties which have closed recently. They choose the 2 or 3 which most closely match the subject property and use them for comparison. Since these comparable homes have closed recently, they are assumed to represent market value.
Once the appraiser has the comparable properties identified, they will then compare the subject property to them. They will add or subtract value for size, location, amenities, features, upgrades and so on until they have a value for the subject property. This is then reported to the lender in the form of a final appraisal.
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