At your last closing you signed a piece of paper called a "Right to Receive an Appraisal." This notice states something to the effect that "you have a right to receive a copy of your appraisal" and you should ask for and receive a copy for your records.

But now that you have your copy, what exactly do you do with it and what do you look for, other than the nice pictures of your new home?

Lots of things, really. You just need to know how to read through the hieroglyphs.

You'll notice on page two of your appraisal there are two methods of valuation, the one at the top is called the "Cost Approach" and the one just below it is the "Sales Comparison Analysis."

The Cost Approach is pretty straightforward. This method attempts to determine value by calculating how much it would cost today to build your home today. By measuring the square footage of the home and multiplying that number by a cost-per-square-foot number you'll get a "Dwelling" cost. Now add improvements such as a swimming pool, fencing, garage, or other improvements. Then by subtracting any depreciation for age and adding value for the lot, you'll see a number next to bold print indicating the "Value by Cost Approach."

But most lenders don't use the Cost Approach number when determining valuations or maximum loan amounts. They use the "Sales Comparison" method.

The Sales Comparison method takes the sales price of your home and compares it to other sales in your area. Three or four recent sales not more than twelve months old and in or around your neighborhood.

Since none of the homes will likely be the exact same sales price, square footage or design the appraiser will need to make certain adjustments. If you'll look down the columns labeled 1, 2 and 3 you'll see these adjustments in dollars. If home number 1 sold for $100,000 but was 200 square feet larger than your home, your home will be adjusted by 200 square feet times the going price per square foot in your area.

If home number 2 sold recently but was 10 years older than yours, another adjustment will be made. Three car garage? Larger lot? No fence? Ditto, ditto, ditto.

After all these adjustments are made the appraiser determines the Sales Comparison analysis and compares it to your sales contract to reach an indicated value by Sales Comparison Approach.

So what good is the Cost Approach?

It's an important number for you and your insurance agent to know. If the cost method is higher than your loan amount, what do you want covered for insurance purposes, your loan amount or what it would take to re-build from scratch should disaster occur? The cost approach of course.

Yet since many lenders require minimum coverage for just the loan amount sometimes homeowners can be lulled into thinking that's all they need. Don't fall for that trap. Review your cost approach to make sure you're fully protected.

Alternatively, be aware that land cannot generally be insured, the theory being that the land will remain intact and usable even if there is a disaster. For details, speak with your insurance broker.

At the very bottom is the reconciliation where the appraiser estimates the Fair Market Value of your property. It is upon this number that lenders typically base their loan terms. So now you know the basics of appraisal reading. Pour yourself a cup of coffee, light a fire and read that appraisal.

For more articles by David Reed, please press here.

Published: October 12, 2001

Use of this article without permission is a violation of federal copyright laws.

, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.