You have many answers to this question and many different opinions. Some provide incorrect information in my opinion. Unless the scope of work is changed the appraiser is hired to provide an estimate of market value. This estimate will be the same regardless of if the client is a bank, mortgage broker, private owner, REO company, etc. Appraisers use three approaches to value- Sales comparison (also known as market approach), cost approach, and income approach. In general, for single family homes the income approach is not utilized. This leaves the cost and sales comparison approaches. The cost approach works up a value estimate based on national cost guides that use local adjusters to determine an estimated cost to build the home. The appraiser then depreciates the structure and adds in the value of the land. For newer homes the cost approach is a reliable indicator of value. For older homes the cost approach is not a reliable indicator due to the inaccuracies involved in estimating accrued depreciation. Generally you will see the cost approach used on newer homes or if the client request it be used.
Keep in mind there is the common misconception that cost equals value. This is not the case and I think this is the basis of your question. I have appraised new homes that have spent over $100,000 on site work for a variety of reasons (Soil condition, etc). Well this is clearly a cost to the owner however it didn't add anywhere near $100,000 in value to the home. I have a home right now that the owner claims cost $400,000 to build. However, he built the home on the corner of a busy road. Due to the external obsolescence created by the traffic noise the market value of the home is significantly less then the reported cost.
To answer your question, most of the time cost and market value are the same. However, sometimes they aren't. The cost approach serves a good check of the estimated market value. If a home buyer can build a new home cheaper they will choose building over buying an existing home.
Hope this helps!
A lot of answers but not to the specific question you posed. The appraisal is indeed an opinion of what the market value of a home is at the time of inspection. You can perform appraisals for a different point in time as well, but that is not germane to your question here. The cost of a home is the monetary value (dollars) it would take to (re)build it. That specifically excludes the underlying land as that is considered to be immovable. This is why your home insurance is always for a lesser value than the appraised market value.
The Cost Approach that is sometimes used in an appraisal report attempts to recreate the cost of rebuilding the home (with similar materials and appropiately adjusted for age depreciation) and then adds the estimated value of the associated land.
Now keep in mind that the appraisal report is an opinion of value that does differ somewhat between appraisers. However, the development of that opinion is an involved but systematic process that clearly shows the underlying arguments put forward to come at that value. When done correctly and consistently, there usually are few surprises at closing when the borrower attempts to get a mortgage loan for the purchase. Remember, appraisers merely report the market. Unlike realtors, they cannot make the market.
Let me know if you have any further questions.
Jacobus "Jack" Vollenberg
RE Appraiser/RE Sales Associate
Vollenberg Appraisers/ERA Statewide Realty
The key to the appraisal is to see if the value is at or above what you are paying for it, if it is under you will have to have the seller reduce the price or come up with the difference at closing. If it is at or above you will do nothing, as you will be on yoru way to closing shortly. Now the appriasal may not give you what the true value is as the appraser needs to keep the value at or near what you are paying for, if they value it too high the bank will want to know why you are paying such a low price.
good luck with your purchase
The bank requirements put on the appraiser in this market are 1) same zip code 2) same school district 3) preferably SAME NEIGHBORHOOD but certainly not more than 1/2 mile distance from the subject house and 4) MOST IMPORTANT they can only deal with the most recent of closed sales, under 3 months ago.
"an estimate or opinion of the value of a piece of property or parcel of land, as of a certain date, and supported by objective data".
What should you expect? A qualified opinion of what is the MARKET VALUE of the home you are looking to purchase. Market value is the most probable price a home should sell for, however, it is not a guarantee that the house will actually sell for that price.
Since an appraisal is an estimate, you will get different answers from different appraisers. If the property is "typical" for the neighborhood, these opinions or estimates should be very close in value.
Hope this helps!
Solutions for Real Estate
ABR Accredited Buyer Representative
FIS Foreclosure Intervention Specialist
HUD Registered Bidding Agent
I agree with Lori. Each appraiser has their own view and opinion. Some appraisers are more detailed oriented than others. Don't be afraid to ask another new homeowner about their bank's appraiser.
Shelley Englert, Realtor