A Buyers Guide to Buying a Home - Understanding the Appraisal

Home Appraisals

Lenders require appraisals to confirm that the home for which they're providing you a loan is in fact worth the amount you're paying. 

Three approaches to value
There are three general groups of methodologies for determining value. These are usually referred to as the "three approaches to value" which are generally independent of each other:

1. The cost approach
2. The sales comparison approach and
3. The income approach

Single family residences are most commonly valued with greatest weighting to the sales comparison approach.


The cost approach
The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches. For example, while the replacement cost to construct a building can be determined by adding the labor, material, and other costs, land values and depreciation must be derived from an analysis of comparable data.  The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties. 


The sales comparison approach
The sales comparison approach is based primarily on the principle of substitution. This approach assumes an informed buyer will pay no more for a property than it would cost to purchase a comparable substitute property. The approach assumes that a typical buyer will compare asking prices and seek to purchase the property that meets his or her wants and needs for the lowest cost. 


Since comparable sales are not usually identical to the subject property, adjustments may be made for date of sale, location, style, amenities, square footage, site size, etc. The main idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If the adjustment to the comparable is superior to the subject, a downward adjustment is necessary. Likewise, if the adjustment to the comparable is inferior to the subject, an upward adjustment is necessary. From the analysis of the group of comparable sales, the appraiser selects an indicator of value that is representative of the subject property.


Income approach
The income capitalization approach is used to value commercial and investment properties. Because it is intended to directly reflect or model the expectations and behaviors of typical market participants, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists to apply this method.

Appraisers are independent agents normally hired by the lender, however you may have a choice. The fees appraisers charge vary and are typically built into your loan costs. Your lender may also require a Location Survey that certifies the house is within the boundaries of the lot. The lender often selects the surveyor, but again, you may have a choice. The lender usually pays for the cost of an appraisal then it's factored into the buyer's closing cost.

Understanding Property Taxes

The property tax is the primary source of local government revenue in Texas and provides funding for the services provided by counties, cities, school districts, and a variety of special entities such as community colleges, port authorities, hospital and flood control districts, and municipal utility districts. While the total combined state and local tax burden in Texas is among the lowest in the nation, the portion of the tax burden borne by property taxpayers in Texas is relatively high.

Under Texas law, all real property (land, buildings, etc.) and tangible personal property used for the production of income (business inventories, equipment, etc.) is taxable at its January 1 market value unless exempt by law, or unless subject to special appraisal provisions, such as the appraisal of agricultural land at its productivity value.

Three factors determine the total amount of taxes imposed on a property. These include the appraised value established by the appraisal district for the county in which the property is located; the exemptions, if any, to which that property may be entitled, such as the homestead exemption for owner-occupied residential property; and the tax rates set by the governing bodies of the taxing units (jurisdictions) in which the property is located. The purpose of the appraisal is to allocate the tax burden fairly among all taxpayers.

For owner-occupied residential property receiving a homestead exemption, appraised value may be lower than the property’s market value because of what the law refers to as the “homestead cap.” Under current law, while a homestead property’s January 1 market value isn’t capped, that property’s appraised value is capped at a maximum increase of 10% each year. For example, the January 1 market value of a capped residence might be $200,000. However, if that home were appraised at $175,000 on January 1 of the prior year, this year’s appraised value would be $192,500 ($175,000 x 1.10). A residential property qualifies for the cap the year after the year the owner first receives his or her homestead exemption on the property. In our present economy, there are likely to be situations where the market value of a home may have decreased as of January 1, 2010, but the 2010 appraised value may still increase because it was capped last year at less than the current market value.

For more information about any information presented in our Real Estate Forum or for a free consultation contact Own Realty Group.