How appraisers develop their opinion of home value

Appraisers develop their opinion of value, also known as a home's appraised value, by following strict rules outlined in the Uniform Standards of Professional Appraisal Practice. As part of the appraisal process, they use specific methods and in-depth research and analysis to arrive at a final opinion of value.

What does "opinion of value" mean in an appraisal?

The term "opinion of value" refers to an appraiser's professional, fact-based estimate of what a property is worth. Experts at The Appraisal Foundation say appraisers must always remain objective, using clear evidence and relevant research to back up their opinion. Their job is to deliver a complete and honest report of a home's value that doesn't favor anyone or discriminate.

What are the methods used to determine home value?

There are three main valuation methods: cost, sales comparison, and income. Appraisers use one or a combination of these methods to develop their opinion of a home's value.

1. Cost method calculates how much it would cost to completely rebuild the home. It includes the value of the land, adds the cost of construction, and subtracts any loss in value from age and everyday wear. Appraisers often use this method for new homes or for unique properties without many similar homes to compare.
2. Sales comparison method compares the home to similar properties that have recently sold in the area, known as comparable properties or "comps" for short. Appraisers look at factors like location, size, condition, and features, and adjust the sale prices of the comps to reflect how they differ from your home.
3. Income method gauges a property's value based how much money it could generate, commonly used for rental or investment properties. An appraiser figures out how much income a property can earn, subtracts the costs to operate it, and then uses a formula to estimate how much the property is worth. This method is often used for homes rented out to tenants.

Appraisers associated with The Appraisal Foundation shared that the sales comparison method is the one they use most often. However, depending on the property type and the information available, they may use an additional method.

How does the local market impact a property's value?

When appraising a property, appraisers consider what the local market values. For example, a rooftop garden might be highly valued in a city, while a private dock could be more desirable on a waterfront property. Here are some more features that can add value, depending on the location:

• High-efficiency heating in cold climates
• Outdoor living spaces in warm climates
• Smart home technology in tech-savvy markets
• Solar panels in eco-conscious communities
• Proximity to public transportation in urban areas
• Historical architecture in preservation districts

Which features commonly add value to a home?

While there's no guarantee a specific feature will add value, some tend to appeal to a wider variety of buyers. If comparable properties support it, these features may positively impact a home's value:

• Updated kitchens and bathrooms
• Hardwood flooring
• Open floor plans
• Extra storage
• Finished basements
• Modern heating and cooling systems

Keep in mind that the value of a home's features can change over time. Things like buyer demand, location, and market conditions affect which features add the most value.

What do market, appraised, and assessed values mean?

People often confuse the terms "market value," "appraised value," and "assessed value." Chris Posey, a real estate appraiser with 20 years of experience, explained to Progressive that appraised value and assessed value are both opinions of a home's market value, but they're developed for different purposes.

• Market value is the price a home would likely sell for under normal conditions—meaning both the buyer and seller understand the housing market, don't feel pressured to act, and the house has been on the market for a while. Factors like how many buyers are interested, what similar homes are selling for, the economy, and buyer/seller negotiations all affect a home's market value. Because market value is specific to a date, it might not match the final sale price if the market changes quickly or the sale includes unusual terms.
• Appraised value is a licensed appraiser's professional opinion of a home's market value that's developed through in-depth research and analysis. Mortgage lenders use this value to determine how much they're willing to lend and generally expect the appraised value to reflect a home's market value.
• Assessed value is also an opinion of a home's market value; however, it's developed by a local tax assessor for tax purposes. Local governments typically use this value as part of their formula for calculating property taxes. Some municipalities apply an assessment ratio or other adjustments based on local tax laws, meaning a home's assessed value may be higher or lower than a recent appraised value or sale price.

As you consider your home's value, learn about other property valuation tools for homebuyers and sellers, and use our Home Appraisal Advisor to find answers to your appraisal questions.