When you buy a home, your lender will order an appraisal to determine the fair market value.

The appraisal is important to the lender because the home serves as collateral for the loan. If you’re unable to repay your mortgage and the lender forecloses, it wants to be able to sell the home to recoup the money it lent you, so it has to make sure you’re not overpaying.

Let’s look at the factors that affect a home’s appraised value.

Location

The desirability of the home’s location is a key determinant of its appraisal value.

A small, outdated home in a well-maintained neighborhood that has great schools, low crime and a convenient location for working and shopping will often be worth more than a larger, nicer home in a neighborhood that’s run down, crime-ridden and/or far away from centers of work and play.

Also, proximity to airports, railroad tracks, busy streets or other nuisances will make a home worth less than the same home in a more tranquil setting.

Property type

All else being equal, a detached, single-family home will be more valuable than a condo, townhome, row house or other attached property.

When you own a single-family home, you also own a piece of land. That’s not true with other property types, and land can be very valuable.

Square footage and lot size

A larger home will generally be worth more than a smaller home, and a larger lot will generally bring a higher appraisal than a smaller lot.

Number of bedrooms and bathrooms

Most buyers want a home with at least three bedrooms and two bathrooms. These homes have a higher appraisal value and higher resale value because they appeal to a wider variety of buyers.

A home with one or two bedrooms and only one bathroom may only appeal to single buyers and cash-strapped young couples.

Age

Unless it has been immaculately maintained and upgraded, an older home will usually appraise for less than a new home. Older homes often have maintenance problems that cost homeowners money.

They also have outdated features that make them less useful to today’s buyers and that may warrant expensive renovations to meet current standards.

Overall condition and improvements

If a home needs significant repairs or has outdated features and finishes, it will have a lower appraisal value than a home that is in excellent condition and that has all the bells and whistles today’s buyers demand.

That being said, if a home is overimproved compared to other homes in the neighborhood, the home will appraise for less than such improvements might command in a more upscale neighborhood.

Comparable sales

No matter how nice or how ugly a home is, the value of neighboring homes will influence its value. The appraiser will look at what homes in similar condition and with similar square footage and lot size have sold for in recent months. These comparable sales show what other buyers have been willing to pay for similar homes.

Experience and subjective opinions of individual appraisers

No two appraisers are likely to give a home an identical value because of their subjective interpretations of the value of a home’s characteristics.

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