Appraisals: Sales Comparison Approach or Cost Approach?

Question

Which value do Lenders use? I have an appraisal where the appraiser used one value for Sales Comparison Approach, another (4K higher) for Cost Approach, but at the end of the report under the reconciliations area, he shows a value $15K less than the Sales Comparison approach. Could this be a typo? I will verify tomorrow but I'm on pins and needles here.

Answer 1

Residential properties.. Sales Comparison approach because that is the market price. The lenders can care less how much it costs unless someone will buy it and the selling prices sets the market price.

In commercial properties...income approach. Again, if rental income is not there, you can't pay the mortgage.

For Churches, schools, hospitals, public buildings, there are very few comparisons. So they usually use replacement cost. Your replacement cost probably was adjusted downwards due to depreciation or the age of the property.

Answer 2

Some lenders require the use of multiple approaches.
In the reconciliation of value they will choose the value using the most appropriate approach for the specific property.
I know that some lenders want the cost approach and sales comparison approach for single and two family residences. They want to know what it would cost to rebuild the property if it is damaged in a fire, storm etc. If the appraiser had a value using the Sales Comparison approach at 100k and 104k using Cost Approach there is no way he should reconcile the value at 95k. It has to be a typo.

Answer 3

It's a good idea to verify. Almost all lenders are in the business of loaning money. So, if you are a qulified buyer, they will try hard to get you the loan you want and need to buy a home. Especially if you are in the area where the real estate market is NOT going really really bad and the home values are not dropping drastically, there should not be many troubles. Refinance is a bit different. Appraisals do come lower in some cases. You can, however, dispute a low appraisal. Good luck to you.

Answer 4

These are two "valuation approaches" used by an appraiser to determine value. The sales comparison approach will take into account properties that are similar to yours (comps) to come up with an adjusted value for your property. The appraiser is basically looking at homes similar to yours and then making adjustments to them, to make them as similar to yours as possible so that he can understand the value of yours. The Cost approach is a valuation indicating what it would cost to rebuild your home today based on a set of criteria and using depreciation principles that separate the "cost" of the building from the land. For the purposes of lending in residential properties the Bank will typically place more weight on the sales comparison approach to valuation.

Answer 5

Most banks will use the sales approach for purchases. If you own the property and are refinancing the property after having put a significant amount of money down, some backs will use the cost approach. But I would still verify with your local lender.

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