These days, the market value of homes is in constant flux. Homeowners who want to refinance, take out equity loans, or verify their assets need to rely on updated appraisal information. Understanding this data requires knowledge of how to read an appraisal report.

This year, homeowners may need to convince lenders of the value of their homes in order to qualify for refinancing or other equity-based loans. One way to do so is to present the lender with fresh and objective appraisal data that supports higher values. Appraisal reports can also be used to convince buyers to bid higher. They also come in handy when validating homeowner insurance claims.

Introduction to appraisals

Here's what the report contains and an explanation of how to read it:

  • A typical appraisal will have an introduction that states the particular objectives of the appraisal, while also describing the methods and approaches used to determine value.
  • Then comes a section dedicated to geographic and market analysis. This explains the current market environment and talks about local economic trends, what kind of properties are in the vicinity, and how much demand there is for real estate in that particular location. Beachfront property in a popular resort would be listed as valuable, for instance, but if homes right on the beach have been washing away in recent hurricanes, that would be cited as a potential liability.
  • Next is a legal and physical description of the property. This explores things like local ordinances or deed restrictions, and it also explains the type of construction used to create the building, its structural features, and its size and condition. It might also include whether or not a residential home can be legally used to operate a commercial business. Another piece of info might be if the building has rare architectural elements or was built of premium designer materials instead of mediocre ones.
  • Finally, there's a section of the report that analyzes what's known as "highest and best use"-a term that refers to the maximum value of a property when used in a particular way. A vacant lot in downtown New York City, for example, isn't utilizing its highest and best use, because the owner could make more money by building and renting an office building or hotel at that location. In this way, "highest and best use" is employed as a method of putting the current use of a property into overall market perspective.

Keeping it clear

If you receive a report and don't fully understand it, insist that the appraiser explain everything in a clear way that answers all your questions. That's one of the most important jobs of the appraiser. Before hiring one, make sure that he has the patience and ability to help translate the document in a meaningful and unambiguous way. Ask him to walk you through a typical report, and show you what everything means.

Published on July 8, 2008