An appraisal entails having a state-licensed appraiser estimate the value of your property using a range of factors. Generally, a real estate appraisal versus a bank appraisal will result in essentially the same conclusions, with only minor differences based on the purpose for which the appraisal is completed. Although "real estate appraisal" is the more commonly heard term, the term "bank appraisal" may be used interchangeably by those in the banking industry.
Real Estate Appraisal
A real estate appraisal should be performed prior to putting your house on the market if you are selling it. You also may have your own independent appraisal performed on a home you are looking to buy, to ensure you are getting the property at a fair price. When carrying out a real estate appraisal, an appraiser will look at multiple valuation factors, such as square footage, age of the property, location, selling price of comparable homes in the area, unique amenities of your property (e.g., the view, any additions or a pool) and the overall condition of the home.
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When your lender seeks a bank appraisal to determine the loan amount for your new mortgage, refinance or second mortgage, it basically entails the same thing as having a real estate appraisal performed. All the same valuation factors will be assessed, and the results are used by the lender to ensure there is sufficient value in your property to cover the loan amount. With a bank appraisal, the lender may be looking primarily for information on your property's current fair market value and how it measures up to comparable homes in the area for resale purposes.
Fair Market Value
The fair market value of a property is essentially how much buyers will pay to buy it. Usually, appraisal values come in below the market value of a property, and lenders prefer this as a way of ensuring that they are not loaning you more than your house is worth. The amount buyers are willing to pay is the truest indicator of a property's value.
Basically, there are two main types of real estate or bank appraisals performed on residential properties. The cost approach is one method an appraiser uses, whereby, she considers the value of the land on which your home sits, along with the total cost needed to replace your home if destroyed. The cost approach is useful for newly built homes and can be utilized when a lack of market activity in the surrounding area limits the worth of the sales comparison approach.
Sales Comparison Approach
When conducting a real estate appraisal or bank appraisal for a single-family home, appraisers mainly rely on the sales comparison approach to valuate properties. With this approach, the appraiser compares your property to comparable properties (comps) in the area that have recently sold (usually within the past three to six months). The appraiser also takes into account any easements on your property and the age and condition of the home in comparison to competitive properties; his comparative analysis will focus on the similarities and differences between your property and comps in the area, and how those factors affect value.