Home purchases usually involve an appraisal. Lenders will condition for an appraisal to make sure that the collateral (the house) is substantial to back the loan they’re offering. Even buyers who pay with cash will sometimes contract an appraiser to verify that the market supports the price they intend to pay.
If you are a home seller, you may want to know what you can do to prepare for an appraisal. Appraisers are independent third parties and you will not be able to discuss things with the appraiser beforehand, but it might help to know the basics of the Uniform Residential Appraisal Report (URAR).
Basic Parts of the URAR
Subject Property – This section comes first on the URAR. The appraiser lists details of the subject property such as the address and recent sale date if any. The appraiser performs a visual inspection to verify that the subject property is in fact at the location named on the purchase agreement.
Contract – This section includes pertinent details from any purchase agreement in effect.
Neighborhood – A description of the surrounding neighborhood and relevant statistics appear here.
Site – The site section discusses land, utilities, and easements/encroachments.
Improvements – Improvements refer to features of the subject property, such as flooring.
Sales Comparison Approach – The sales comparison approach is the most common method of valuation. It occupies a substantial section of the URAR. To complete the sales comparison approach, the appraiser finds and assesses comparable properties. Ideally, comparable properties include a mix of active, contingent, and sold properties that are geographically close to the subject.
The comparable properties, also called comparables, help the appraiser determine a value for the subject property. Each property and its features are rated as the same, inferior, or superior to the subject and the value is adjusted accordingly. Many items are assessed in this section. For example, a three-car garage would be rated as superior to a two-car garage.
Income Approach – This approach to value is useful in the appraisal of income-producing properties. Therefore, it is often required for investment loans.
Cost Approach – The cost approach assumes that a buyer would not pay more for an existing home than they would pay for the cost to construct the same home. Construction loans typically condition for this part of the URAR to be completed. FHA and VA loans may require a value estimate based on the cost approach (in addition to the sales comparison approach).
Planned Unit Development (PUD) Info – PUD’s often have features like recreational facilities and homeowner’s services that could affect the value of the subject property. If this is the case, the appraiser will make any relevant value adjustments.
Additional comments (if any) and the appraiser’s contact information are included near the end of the report.
Items That Could Affect Value
The appraiser’s opinion of value is an important piece of the home purchase package. When comparing the subject property to other homes, the appraiser will look specifically at condition, age, updates, location, number of rooms, square footage, size of the garage, improvements to the interior and exterior of the property, and functional utility. The functional utility is the ability of a home to serve its intended purpose. The appraiser will also compare the heating and cooling units (if any) to those of the other properties.
Of all the items on the appraisal, the most important (arguably) is location. For this reason, appraisers will value proximity to the subject property over other items when selecting comparables for the URAR.
An FHA appraisal should theoretically yield the same value opinion as a conventional appraisal but may result in additional closing conditions. The Department of Housing (HUD) requires that the property meet certain physical requirements, be free of hazards, and have acceptable marketability before FHA insurance will be offered. (source: https://www.hud.gov/sites/documents/41502C4HSGH.PDF)
The United States Department of Veterans Affairs (VA) appraisals also follow a unique set of guidelines. The VA stipulates that certain conditions affecting the marketability and livability of the home must be in place. The VA calls these conditions “minimum property requirements.” An example of a minimum property requirement would be an updated electrical system in working order. (source: VA Lender’s Handbook)
Those are the basic sections and guidelines of the URAR. Appraisers look more at the location, livability, and structural integrity than cosmetics. Keep your house in good working order and you should be ready to go when the appraiser arrives.