Except when insured by the FHA and VA, few banks will make loans in excess of 80 percent of the house's value. And the value they use isn't the sale price but the value the appraiser sets. Don't be surprised if the appraiser sets the value of the property many thousands of dollars below the price you had agreed to pay. The seller hasn't necessarily bilked you. The standards the appraiser used to judge the property probably diverged from your standards. The actual sales price rarely coincides with the fair market value of the property for these reasons:

The price of a property should equal its "fair market value." Appraisers define that as the highest price a buyer is willing to pay and the lowest price a seller is willing to accept when both are operating in a free market, with full knowledge of all the facts, and acting voluntarily without compulsion. An alternative definition is that it's the highest price that a property will bring if exposed for sale in the open market, allowing a reasonable time for finding a purchaser who buys with knowledge of all the uses to which it's adapted and for which it's capable of being used. Both these definitions assume an open, efficient marketplace. Ignorance, fraud, and a number of external political and economic factors can distort the determination of market value. These factors include inflation and rent control.

In arriving at a conclusion on the value of the subject property, the ap-raiser makes a survey of properties that have sold recently within the general area. These properties are within an adjustable price range and are compared feature for feature with the property under consideration. Consideration is ;iven and adjustments are made on each comparable sale as to time of sale, size, location, age, and other factors that might affect its value. Terms of sale,

price, and interior appointments are verified by examination or consultation with other brokers. As it's impossible to find an identical property to that of the subject, since no two buildings are identical, the appraiser must make adjustments to each comparable. This approach is the most reliable because it reflects the reactions of typical buyers and sellers in the market. For most commercial property and idiosyncratic houses, this approach may have limited value.

The cost approach is the reproduction cost of all improvements in new condition, less accrued depreciation, plus the value of the land. The appraiser has gathered current costs from local contractors engaged in building similar properties in the area. He has compared these costs to known costs published in cost manuals and by the Society of Real Estate Appraisers. The value of improvements is based on the square footage of the structure. To determine the area of a house, multiply outside measurements above the foundation, length by width. Square footage includes all heated interior space, even stair-wells and closets. Excluded are basements, garages, and attics. If a two-story house measured 40 by 20 feet, it would have 800 square feet on each floor, for a total of 1,600 feet. A finished basement would be measured inside and listed separately. Different appraisers have their own standards for the upper floors of Cape Cods, heated porches, basement rooms with windows above grade, walkout basements, heated garages, and lower areas on split-level houses. The goal is to measure usable living space.

The cost approach will result in a fair estimate if all elements are figured accurately, for no reasonable buyer will exceed the price of a substitute prop-erty that offers the same amenities. Distortion occurs when the building has structural elements that are difficult to duplicate. Appraisers also tend to underestimate the cost of a new replacement. A new building may cost $60 a square foot to build. The appraiser may set a baseline figure of $30. Make sure you check all the appraiser's assumptions as to the amount of depreciation that is deducted.

Depreciation must be subtracted from the replacement cost new to adjust the property's value because of age. As time goes by, the building will deteriorate. However, the owner will also maintain or improve the building. The appraisal should reflect this dual process of deterioration and rehabilitation. Depreciation represents the loss in value that may come from age, the presence of undesirable factors, and other circumstances.

Depreciation can be of three kinds. More than one kind of depreciation may be present.

1. Physical depreciation is the physical wearing out of the structure. If a building needs painting or has broken windows, it suffers physical depreciation. Some physical depreciation is curable, such as a leaky roof. Some is incurable, such as inherent bone structure deterioration.

2. Functional depreciation is the result of undesirable layout, design, or other features, as compared to a new property. Some functional depreciation is curable, such as an old kitchen. Some is incurable, such as inadequate hallways or space.

3. Economic depreciation is the loss of value from causes outside the property itself. Zoning changes, proximity to nuisances, and changes in land use are causes of economic obsolescence. Economic depreciation is al-most always incurable.

To the value of the structure is added the value of the lot, garage, sheds, and the like. The total indicates the fair market value of the property. Land value is usually estimated from recent comparable land sales in the area by the square-foot or front-foot method.

The income approach is the third approach used to estimate market value. It's most effectively used with properties that are intended to produce income. To apply the income approach to the single-family residence, the appraiser will consider the monthly rent in relation to the sales price and arrive at the gross rent multiplier. The gross rent multiplier is the number arrived at by averaging how many times more than their gross monthly rental value houses are selling for in your area. This multiplier is abstracted from the market by taking rented properties that have sold and by dividing the sales price by the assumed monthly rent. The economic rent is estimated by comparing other comparable rented properties. The gross rent multiplier is then multiplied by the estimated economic rent to arrive at an estimate of value for the subject property.