Buyer's Market

• Real estate appraisals evaluate a home through the eyes of a hypothetical buyer, who is informed about the local real estate market. When a buyer tours a home, she pays attention to the cleanliness of the bathrooms, the scuffed paint in the hallway, and 1940s era linoleum in the kitchen. While cosmetic conditions alone don't necessarily cause a home's value to plummet, if a buyer has the option to buy a similar home that's free of such maintenance issues, she will weigh that option against the time, trouble and cost of bringing the home up to her standards.
  
  

Economic Factors

• The economic principle of substitution drives the analysis process in an appraisal. Appraisers recognize that buyers typically can choose from more than one home that suits their living requirements. If two homes provide essentially the same living space in the same neighborhood, for example, buyers will generally purchase the lower-priced home. If one home is well maintained and has an updated kitchen and bathrooms, buyers will judge the value of the upgrades against a similar home that would require them to invest further in those upgrades. In other words, the updated home provides more value with less financial risk. An appraiser assesses the condition of similar homes with these principles in mind, measuring the economic value of each home in the comparison.
  
  

Effective Age

• An appraisal expresses a home's condition as well as its effective age. In contrast to a home's actual age, the effective age judges the home's overall maintenance and upgrades. If the homeowner renovated a 100-year-old home with enlarged bedrooms, walk-in closets, new kitchen and an open floor plan, for example, the appraiser may assign an effective age of 25 years. A 35-year-old home that has never been updated may have an effective age of 45 years. In a side-by-side comparison, the upgraded home could add significantly to the overall value of the home.
  
  

FHA Guidelines

• The Department of Housing and Urban Development (HUD) requires appraisers to note a home's deficiencies in the appraisal report for FHA lending purposes. Appraisers must photograph problem areas and recommend repairs. Specifically, appraisers report leaking roofs, inadequate access from a bedroom to the outside, damp basements, standing water against the foundation and faulty electrical, plumbing or heating. Some conditions may require an additional inspection to determine if the condition can be repaired. If warranted, HUD may require repairs before approving a mortgage on the home.