A written estimate of the value of real or personal property prepared by a qualified appraiser. Mortgage lenders almost always require a property appraisal before approving a home loan.

Appraisers usually make use of three methods when valuing homes. The most popular method is the “sales comparison” method. It involves examining recent home sales in the area (often called “comparables” or “comps”) and selecting the ones most like the property being appraised (the “subject property”). The subject property’s condition, construction quality and features are compared to the comps, and its value is adjusted up or down. For example, if an appraiser is appraising a house in a development or tract, and an identical home sold recently for $200,000, she might start at that value. If the subject property has a better view or nicer landscaping, its value might be increased by $10,000. If, however, it hasn’t been maintained as well as its comp, the appraiser might subtract $5,000. After a series of many adjustments has been completed, the appraiser arrives at a final value.

Another method is the “cost approach.” The appraiser calculates what it would cost to buy an identical lot and construct that same house, then subtracts for depreciation and arrives at the appraised value.

Finally, there is the “income” approach. This is used primarily when valuing investment or rental property. The appraiser takes the rental income of either the subject property (if rented) or similar comps, and calculates the price that would provide the rate of return a typical investor would require for a similar property.

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What is a contingency in real estate?

Definition of Contingency

A contingency is an event or condition that must occur before the deal can close. Typically, a buyer will reserve the right to recover her earnest money if the contingency is not satisfied. For example, if a buyer submits an offer that includes an inspection contingency, the buyer has a specific period of time during which the buyer can inspect the home and, if it is unsatisfactory, rescind the offer. So long as the buyer complied with the terms of the contingency, she can usually recover her earnest money.

Here are some of the most common contingencies:

  • Financing contingency: If a buyer needs a mortgage loan to buy the home, the buyer will typically include a financing contingency that allows the buyer to terminate the deal if the loan is not approved via a loan commitment letter by a certain date.
  • Inspection contingency: This gives the buyer the right to get the home inspected and negotiate further if there are repair issues. The inspection usually happens 5–7 business days after mutual acceptance. With real-estate-owned homes (REOs), the banks rarely agree to pay for any repairs; buyers should still get an inspection, but they'll need to cover any repair costs themselves.
  • Sale contingency: The buyer's offer on a new home is contingent upon the buyer selling his or her current home.
  • Title contingency: The buyer's offer is contingent upon title to the home being clear of any liens. This contingency grants the buyer the right to review a title report, which documents the home's history of ownership.
  • Appraisal contingency: The success of the offer depends on an appraisal confirming that the home's value is equal to or greater than the buyer's offer amount

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