Selling Guide - Home Appraisal

When a buyer has financing, a home appraisal is required for lenders to approve their loan.  Home insurance companies use the appraisal as the basis on their coverage. A lender will not lend more than the unbiased valuation of a home (i.e., what the home is worth).  Appraisals are performed by an independent party with no interest in the property.  

There are three types of appraisals: 

1. Cost Approach. The appraiser determines how much it would cost to replicate your property at today's prices.  Insurance companies and construction loan lenders will use the cost-approach.  This is an ideal approach for unique homes that may not easily compare to others.
2. Comparative Market Approach.  Much like a comparative market analysis or broker's price opinion, this method focuses on details of the property, but also compares the home to others which may be highly similar.  The neighborhood, street features, and market trends are taken into account when determining the value of the home. 
3. Income-Capitalization Approach.   If your property is used as a long-term rental or a short-term rental, you may need an income-capitalization approach to determine its true value.  

The buyer's lender will choose the method(s) used to appraise the property.  As mentioned previously, if the appraisal of the home is less than the offered sale price, the buyer will have to either make up the difference, reject the deal, or you can lower your home price to match the appraisal.