You love your home, but let’s face it: its appraisal report is not a real page-turner. No judgment if your eyes start to glaze over halfway through the first section. However, it’s one of those documents that’ll be super useful to decipher if you ever decide to get your home professionally valued or if there’s a dispute over how much your home is worth when you sell it. Understanding how to read an appraisal report is key to making informed property decisions.
In a nutshell, this document contains the appraiser’s opinion of value and the factors the appraiser used to arrive at that number.
“I’d say 90% of the time, appraisers do a fantastic job,” says John Krol, an accomplished Naples-area real estate agent who completes 88% more sales than the average agent in his locale and regularly works with appraisers. But there’s a small chance that “the appraiser doesn’t have what they need or it’s due the next day,” explains Krol. That’s when some honest mistakes might occur.
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We spoke with Krol, consulted with two of the largest appraiser associations in America, and read over tedious appraisal reports to bring you this guide on how to skim one for the good stuff. You’ll know where to search for common errors on the Uniform Residential Appraisal Report, the most commonly used appraisal form totaling 7 pages.
First, obtain a copy of the appraisal report if you don’t have one
When you sell your home, you won’t automatically get a copy of the report, but you can request one and the lender will have to provide it to you in 30 days time. If the appraisal came in under the contract price, your real estate agent will be able to fill you in on the details right away. In the event that you get an appraisal outside of the home sale process, the appraiser should provide you with a copy of the report automatically.
Page 1: Check that your address looks correct
It’s easy to spot errors in this section, but it’s one a lot of homeowners will breeze right past. Focus your attention on page one at the top of the report under the “Subject” section. Confirm that the “Property Address” is accurate, including the ZIP code and County. If it’s incorrect, you might have the wrong report altogether.
Pages 2 and 6: See what your home appraised for
Finding the total appraised value of your property is likely the main reason you’re reading this document, but the figure is surprisingly tricky to find.
Start on the second page. In the lower left-hand corner of the “Reconciliation Section,” you’ll find a fill-in-the-blank section that certifies the total appraisal value as of the date it was conducted.
The same total is on the sixth page, in the lower right-hand corner after the line reading: “APPRAISED VALUE OF SUBJECT PROPERTY.” Make sure these two totals match and confirm the date of the appraisal is correct.
That figure didn’t just fall out of the sky. Next, you’ll want to explore how your appraiser came to it.
Pages 2 and 3: Why is your home worth that much?
Diving deeper into the report, there are three approaches an appraiser can take to calculate the value of your property:
1. Comparable Sales (Page 2). Analyzing comparable sales is the most common approach professional appraisers use to figure out the value of your property. Taking up nearly the entire second page, the “Sales Comparison Approach” uses data from similar recent home sales in your area to determine the value of your property.
In these “comps” selected by the appraiser, you’ll want to pay attention to a few key points:
Date of Sale: How recent was the comparable property sold? Within the year? Longer? If you’re in a rapidly growing market, it’s important that the comp is as recent as possible, as it will reflect the rising rates in your market.
Comparability: The house needs to be similar to yours to be used as a tool of comparison. But only homes that have already sold can qualify as a comp. Make sure all three properties listed have actually sold, and aren’t just on the market. Otherwise, this is an inaccurate reflection of price.
Location: “If your house is on a private lane, and your appraiser used a comp that’s on a major highway, that’s a really poor location compared to yours,” says Krol. “That’s a common error.” A quick glance at Google Maps might tell you all you need to know about a comp’s location as compared to yours.
Cross-reference each of the above points with the actual sales record to ensure there’s no mistake in square footage and sales price. Then, take a look at the “Net Adjustment Total” line to see if the appraiser has adjusted the price of your property up or down based on each comp. If you have questions or if something looks off, loop in your real estate agent for a second opinion.
2. Cost Approach (Page 3). If your property is somehow unique, or new construction, your appraiser might choose to use the cost approach method to determine the value of your home. You’ll find the cost approach section on page 3, under “Cost Approach to Value”
Oftentimes, this method is used on high-end properties when comps just won’t cut it, or a unique property where comps simply don’t exist. It’s also used in instances where your home is under or over-improved for the area. So if you’re the best house or the “needs most improvement” house on the block, your appraiser might choose this method.
The cost approach is determined in two ways:
Reproduction: What would it cost to replicate this property? This takes into account the cost of original materials and the value of the lot itself. It also factors in property depreciation.
Replacement: What would it cost to recreate this property using new materials and methods of design? This assumes you’re not looking for original materials or methods, which might be out of vogue or no longer available. It will also factor in the cost of the lot.
The cost approach method is considered less reliable than comparable sales but is used when there are no comps available.
3. Income Approach (Page 3). Found below the “cost approach” section, the income approach is located under “Income Approach to Value” on page 3. This method should only be used if the seller generates income on the property through renting or leasing it.
The appraiser will take net income on the property, subtract expenses, and calculate the “capitalization rate” or Net Operating Income (NOI) to get an accurate read on the property’s worth.
When it comes to determining value, the appraiser is only required to use one of these methods. Take care to understand why the appraiser chose this method. This section is often best reviewed with your real estate agent, who will have a deeper understanding of comps in your market.
“Many sellers don’t realize the added value of someone who knows the business and is experienced with the valuation process,” says Krol. Don’t be afraid to ask your agent to look over the report, especially the comps, with you.
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