There’s a lot of news about home values and current appraisal values as well as the appraisal process. With markets changing so rapidly it can be a difficult process. The appraisers do not sit in a dark room and use a crystal ball to produce an all powerful document of a home’s value. There’s no magic involved. Here’s how it’s done.
An appraiser needs to compare similar recently sold properties. And it’s not just the final price that counts. They also factor in any "incentives" offered, such as sellers who pay closing costs or remodeling allowances. If similar properties have differences in lot value, condition, improvements adjustments are made.
Perhaps the most important factor that lenders review in an appraisal is the closing dates of the "comparables" (other homes by which yours is measured). Unfortunately, with today’s stricter lending requirements, most "comps" must have sold within the last 60 or even 45 days to carry weight. Markets change so quickly that any sale price over two months old may be completely irrelevant. In this market, in some slower selling areas, an appraiser needs to go further away to find recent sales, which occasionally makes the value suspect to some.
Now a few words about how foreclosures in a neighborhood affect determination of value. Technically, appraisers shouldn't consider them, because they don't fit the Appraisal Institute's definition of "a property reasonably exposed in a competitive market." However, if several area homes have been abandoned, the market in such areas is in fact being driven by distressed sales and the appraised value will reflect this fact.
If you're planning to sell, an experienced Realtor can make you a Comparative Market Analyses which can give you a good approximation of appraised value. If you have concerns about the accuracy of this value, you can order your own appraisal and have this ready to support the value of your home. Unfortunately, an appraisal will be considered out of date within a month or two after the date of completion will no longer have any authority.