I got my start in sales almost twenty years ago selling home loans. The three items that are always needed for any home loan are the three Cs: Cash, Credit, and Collateral.
The first two Cs of the three Cs are self-explanatory, but the third C gets quite complicated. Collateral value, or the fair market value of an asset, requires an appraisal. A home appraisal takes into account:
Location, Square Footage, Age, Condition, and comparable sales within a reasonable distance from the property. Sounds simple, but it’s not quite as simple as it sounds.
When you purchase a home, it is appraised to determine collateral for the loan. Appraisers typically take a few superior properties and adjust down whether they are larger, in a better area, or in better condition. They also adjust the value up by comparing the home to inferior properties. Once the information regarding the home is tabulated and submitted, they calculate two different values:
#1 – The fair market value of the property.
#2 – The replacement cost of the property.
Typically, (not always) the price to rebuild the property in the case of a total loss is less than the market value of the property. The replacement cost is submitted to the insurance company to determine how much your homeowner’s insurance policy will be.
After the home is appraised, a third type of value is calculated for the home. It is called the assessed value, or tax assessment. This assessment is usually far less than the fair market value of the property, and less than the replacement cost. It has to do with how much real-estate tax you will owe on the home. The more your home is worth, the more your taxes will be.