An appraisal is a process that supports a realistic value of a property against which a borrower would like to borrow money. With the changes in the real estate market, appraisals, which are required by lenders, are drawing more attention from lenders as part of the approval process.
To establish the value of a property, appraisers, who in most states need to be licensed, start with an interior and exterior inspection of the property. They then look at recent sales of similar homes, called comparables, or comps. These comparables (a minimum of three) are ideally located within a one-mile radius of what is called the Subject Property and have sold within the previous few months.
Depending on the availability of such comparables, it may be necessary for an appraiser to go outside this radius, especially on custom homes. Examples of this might be homes on oversized lots, or those with finished basements.
Since every home is different from every other, the appraiser will give what are called adjustments to each comparable. These adjustments will account for differences such as the number of bedrooms and square footage in otherwise very similar properties.
Appraisals of investment properties are similar to those of owner-occupied homes, the difference being the preparation of additional documents, including those showing what the rental market for that type of property will bear in that area. The lender needs to know both the market value of the property, and the potential rental income to calculate a cash flow.