How an Appraiser Values a Home

To put it simply, an appraisal is an opinion of value. In New York State, only a licensed or certified appraiser can render such an opinion.

Essentially, an appraiser's objective is to accurately estimate, based on relevant, factual market-derived data, what a typical buyer would expect to pay for a particular piece of real estate at a given point in time.

And typically, the best way to estimate what a buyer would likely pay, is to look at what recent buyers have actually paid for similar properties in the area.

Most often, when dealing with the appraisal of residential real estate (i.e., single family homes, 2 - 4 family properties, as well as individual condo and co-op units), an appraiser's opinion of value is based mainly upon one valuation method, most commonly known as the "sales comparison method."

The Sales Comparison Method

For the purposes of this explanation, it's useful for you to understand that the appraiser will refer to the property being appraised as the "subject property" or the "subject." And he or she will refer to recent sales of similar properties in the subject's market are as "comparables" or "comps."

So, how is the sales comparison approach applied to find the value of a particular piece of real estate?

Simply put, it begins with researching recent sales of properties similar to the subject which are located in the same area or neighborhood as the subject property.

The appraiser then selects several of the most relevant comparable sales (a.k.a. "comps") and begins a process of making value-based adjustments to the actual sale price of each comp.

These adjustments are made to account for significant differences between the subject and each comp. Some examples of significant differences include, dwelling size/square footage, overall condition, amenities, etc.

For a better understanding of this concept, take a look at the following example.

Here's an Example

For example, if the Subject Property was a 1,500 square-foot house and Comp #1 was a 1,300 square-foot house, the appraiser would make an adjustment to the actual sale price of Comp #1 to account for that difference.

Because the Subject Property is bigger, a positive adjustment would be applied to the sale price of Comp #1 to account for value of the difference in size. (See the chart below for an illustration of this example.)

If the Subject Property is in "average" condition and Comp #1 is in "good" condition, the appraiser would make a negative adjustment to the sale price of Comp #1 to account for the value of the difference in condition. (See chart below.)

And to take this one step further, if the Subject Property has 3 bathrooms and the Comp #1 has 2 bathrooms, the appraiser would make a positive adjustment to the sale price of Comp #1 to account for the value of the difference in the number of bathrooms. (See chart below.)

The appraiser will typically apply this method to at least 3, and sometimes as many as 5 or 6 relevant comps.

*Above is an extremely oversimplified example which was given purely for the purpose of illustrating the the basic concept underlying the sales comparison approach. Many other factors are taken into account with regard to the value-related differences of the properties analyzed and the numbers used for the value-based adjustments were arbitrarily chosen with the goal of simplicity in mind.

The Final Opinion of Value

After this process has been applied, the adjusted sale price of the comps analyzed should all end up in a relatively narrow range once the appraiser has applied this method to them. From that point, the appraiser will reconcile those numbers to arrive at an opinion of value for the subject property based upon this approach.

Once that is done, the appraiser will reconcile that number with several other market-related considerations to arrive at a final opinion of value for the subject property.

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