What is an appraisal?
An appraisal is a professional estimate of the monetary value of an asset — for example, a home, a business, a piece of art, or an antique — prepared by a qualified appraiser. A qualified appraiser holds credentials or a license from the regulator or professional body that oversees appraisers in the relevant jurisdiction. Appraisals are used to set values for lending, insurance, taxation, estate settlements, and buying/selling decisions.
Why appraisals matter
– For lenders: they help ensure the loan is not larger than the collateral’s market value, protecting the lender if the borrower defaults.
– For buyers and sellers: they give an independent estimate of fair market value.
– For insurance: they document value of items that exceed standard policy limits or that require scheduled coverage.
– For taxes and estates: they provide an objective measure to support deductions or asset division.
How appraisers determine value (brief)
Appraisers typically rely on multiple valuation approaches, such as:
– Sales comparison: comparing recent sales of similar properties or items.
– Cost approach: estimating replacement or reproduction cost minus depreciation.
– Income approach (for income-producing property): discounting expected future earnings.
Which methods are used depends on the asset type and market data available.
Home appraisals: key points
– Purpose: Commonly ordered by mortgage lenders when a home is bought or refinanced to confirm the property’s value.
– Timing: Usually requested after a buyer’s offer is accepted but before loan closing.
– Who orders/pays: The lender normally orders the appraisal; the buyer typically pays the fee.
– Scope: Appraisers inspect the property, review comparable sales, and produce a written report.
– Not the same as an inspection: A home inspection focuses on condition and safety issues; an appraisal focuses on market value.
What happens if the appraisal is lower than the purchase price
Lenders generally rely on the appraised value to set the maximum loan amount. If the appraisal is below the agreed purchase price, possible responses include:
– Buyer pays the difference in cash to maintain the original contract.
– Buyer and seller renegotiate the purchase price.
– Buyer requests a reconsideration of value or orders a second appraisal (subject to lender rules).
– Buyer walks away if contract contingencies allow.
Checklist — what to prepare before an appraisal (for homeowners or sellers)
– List of recent improvements and costs (with receipts, permits if available).
– A list of comparable homes nearby that sold recently (addresses and sale prices).
– Floor plan, property survey, and any maintenance records.
– Clear access to all rooms and utilities; ensure the house is presentable.
– Information about special features (e.g., upgrades, solar panels, outbuildings).
– Copies of HOA rules or assessments, if applicable.
How to improve your home’s appraisal value (practical steps)
– Complete minor repairs (leaky faucets, broken fixtures, damaged flooring).
– Clean and declutter to make the property more marketable.
– Enhance curb appeal (landscaping, trim paint).
– Gather documentation on recent upgrades and permits.
– Provide the appraiser with a list of recent comparable sales you believe are relevant.
Small numeric example (illustrates a low appraisal scenario)
Assumptions: purchase price = $350,000; appraised value = $335,000; lender permits 80% loan-to-value (LTV) based on appraised value. Lenders typically base the loan on the lesser of the contract price or appraised value.
– Maximum loan based on appraised value = 0.80 × $335,000 = $268,000.
– If buyer expected an 80% loan on the contract price, required loan would be 0.80 × $350,000 = $280,000.
– Shortfall the buyer must cover to keep the original financing level = $280,000 − $268,000 = $12,000.
Options for the buyer in this example: pay an extra $12,000 in cash, negotiate a price reduction, seek a lender exception (rare), or request another appraisal/dispute the report.
Appraisals for collectibles and insurance
For high-value personal property (jewelry, art, antiques), insurers may require a written appraisal by an accredited app
raiser.
Appraisals for collectibles and insurance (continued)
For high‑value personal property—jewelry, fine art, antiques—insurers and lenders often require a written appraisal by an accredited appraiser. “Accredited” means the specialist holds credentials from a recognized professional body (for example, the American Society of Appraisers or the International Society of Appraisers) and follows standard reporting and ethical rules. Insurer appraisals are often focused on either replacement cost (what it would cost to replace the item at current market prices) or agreed value (a value the insurer and policyholder accept for coverage purposes), not strictly market value as used in real estate lending.
Types of appraisal value (brief definitions)
– Market value: The most probable price a property would bring in a competitive and open market under all conditions requisite for a fair sale.
– Fair market value: Similar to market value; often used in tax and legal contexts and assumes willing buyer/willing seller, no compulsion.
– Replacement cost: Cost to replace an asset with one of comparable utility at current prices.
– Liquidation value: Price expected if the asset must be sold quickly, often below market value.
– Income (or capitalized) value: Present value of future income streams (common for rental properties or businesses).
– Insured (agreed) value: Pre‑agreed amount for insurance coverage.
How appraisers work — step‑by‑step (real estate focus, but applicable principles generalize)
1. Define the assignment: identify client, intended use, definition of value, effective date.
2. Inspect the property: interior and exterior inspection, note condition, improvements, fixtures.
3. Collect data: recent comparable sales, rental data, construction costs, local market trends, zoning.
4. Select approaches: sales comparison (comps), cost approach, income approach (if applicable).
5. Reconcile results: weigh each approach and reconcile to a final opinion of value.
6. Report: deliver a written appraisal report that documents methods, data, assumptions, and conclusions.
Worked numeric examples
A. Cost approach (improvements + land − depreciation)
– Land value (site): $100,000
– Replacement cost new of improvements: $300,000
– Estimated physical depreciation: 10% → depreciation = $30,000
– Depreciated cost of improvements = $300,000 − $30,000 = $270,000
– Indicated property value = land + depreciated improvements = $100,000 + $270,000 = $370,000
B. Income (capitalization) approach for a small rental building
– Annual gross rent = $45,000
– Vacancy and collection loss (5%) = $2,250 → effective gross income = $42,750
– Operating expenses (taxes, insurance, maintenance) = $12,750
– Net operating income (NOI) = $42,750 − $12,750 = $30,000
– Selected capitalization rate = 6% (0.06)
– Indicated value = NOI / cap rate = $30,000 / 0.06 = $500,000
When each approach is most useful
– Sales comparison approach: typical for single‑family homes and properties with many recent comparable sales.
– Cost approach: useful for new or special‑purpose properties where replacement cost is meaningful.
– Income approach: used for income‑producing properties and businesses where future cash flows drive value.
Automated valuation models (AVMs)
AVMs such as Zillow’s Zestimate or algorithmic bank tools use statistical models and public data to estimate values quickly. They are useful for screening and rough estimates but can be materially off when data are sparse, when properties are unique, or when condition changes aren’t reflected in public records. AVMs do not replace a licensed appraisal when a formal, defensible value is required.
Challenging or disputing an appraisal — a practical checklist
– Obtain the full appraisal report and the data the appraiser used (comps, adjustments).
– Check factual items: square footage, number of bedrooms/bathrooms, lot size, condition ratings.
– Compare the appraiser’s comps to other recent sales you believe are more comparable; note differences (location, lot, condition, sale date).
– Look for math errors, incorrect adjustments, or omission of relevant sales.
– Prepare a concise, evidence‑based rebuttal (not an argument about price) and submit to the lender or appraisal management company (AMC) asking for reconsideration of value.
– If reconsideration fails, you can request a second appraisal (there will usually be a fee) or file a complaint with your state appraiser licensing board if you suspect unethical behavior.
Hiring an appraiser — quick vetting checklist
– Confirm licensure or certification for the appraisal type and state: licensed, certified residential, certified general (requirements vary by state).
– Ask about professional affiliations (Appraisal Institute, ASA, ISA) and continuing education.
– Request sample reports to check clarity and detail.
– Ask about experience with the specific property type and local market.
– Confirm fees, turnaround time, and whether they follow USPAP (Uniform Standards of Professional Appraisal Practice).
Typical fees and turnaround
– Residential appraisals: often $300–$700 for a standard single‑family home, depending on location and complexity.
– Complex or high‑value properties and personal property appraisals (art, jewelry) can cost $500–$2,000+.
– Turnaround: 3–10 business days is common for residential; longer for complex assignments.
Limitations and assumptions to watch for
– Appraisals are opinions of value as of a specified date; markets can move after that date.
– Accuracy depends on data quality—
– Accuracy depends on data quality — incomplete, outdated, or non‑comparable sales will widen uncertainty in the opinion of value.
– Appraisal is partly subjective — two competent appraisers can reach different conclusions after applying judgment to the same data.
– Scope and limiting conditions — appraisals assume a defined scope (what was, and was not, inspected). An appraisal is not a home inspection; latent defects may not be discovered.
– Market conditions and timing — values are “as of” a specified date. Rapidly rising or falling markets can make a timely appraisal less representative of current asking prices.
– Legal, zoning, and title issues — appraisals typically assume marketable title and permitted use; encumbrances or unresolved legal problems can affect value but may be outside the appraiser’s scope.
– Intended use and client — an appraisal written for mortgage underwriting may emphasize different points than one prepared for estate tax, litigation, or private sale.
– Potential bias and conflicts — appraisers must follow professional ethics, but be aware of possible pressure from interested parties (lenders, brokers, sellers). Verify the appraiser’s certifications and independence.
How to read an appraisal report (quick guide)
– Date of report and effective date of value — the effective date is the date the appraiser is valuing the property.
– Client and intended user — who ordered the appraisal and who may rely on it.
– Property description — legal description, address, site size, building details, condition, and photos.
– Neighborhood and market analysis — supply, demand, trends, and settlement patterns.
– Highest and best use — the use that yields the most probable value.
– Approaches to value — which methods were used (sales comparison, cost, income) and the appraiser’s reasoning.
– Comparable sales and adjustments — the sales used, how adjustments were made, and the adjusted values.
– Reconciliation and final opinion of value — how the appraiser weighed the approaches to arrive at the final value.
– Certifications, limiting conditions, and assumptions — legal statements, standards followed (e.g., USPAP), and items the appraiser relied on.
– Exhibits — maps, photographs, plat, floor plans, and copies of comparable sale data.
Worked numeric examples (simple)
1) Sales comparison adjustment
– Comparable sale price: $300,000
– Adjustment: +$10,000 for superior garage (comparable has 1-car, subject has 2-car)
– Adjustment: -$5,000 for inferior kitchen (comparable kitchen is upgraded vs subject)
– Adjusted comparable value = 300,000 + 10,000 − 5,000 = $305,000
Repeat for several comparables and reconcile to a final indicated value.
2) Income (capitalization) approach — direct capitalization
– Net operating income (NOI) = $30,000 per year
– Selected capitalization rate (cap rate) = 6% (0.06)
– Value = NOI / cap rate = 30,000 / 0.06 = $500,000
Assumptions: NOI is stabilized; cap rate reflects local investor expectations and risk.
Step-by-step: how to challenge or get a second opinion
1) Review the report carefully for factual errors: lot size, bedroom count, condition, omitted features, or incorrect comparables.
2) Ask the lender for a complete copy of the appraisal if you don’t already have it (U.S. borrowers typically have this right).
3) Collect your evidence: recent closed sales, MLS printouts, photos, permits, or documentation of renovations.
4) Request a reconsideration of value from the lender: submit your evidence and a concise explanation of errors or stronger comps.
5) If the lender refuses or the response is unsatisfactory, consider hiring an independent appraiser for a second opinion or a review appraisal (this is a separate engagement and you will pay the fee).
6) For suspected misconduct, contact the appraiser’s state licensing board or professional body; follow their complaint procedures.
Practical checklist before an appraisal
– Confirm the appraiser’s credentials and USPAP/standards compliance.
– Provide the appraiser with a list of recent improvements, permits, and any professional inspections (pest, roof).
– Prepare the property: ensure reasonable cleanliness, provide access to all areas, and supply keys or alarm codes.
– Provide comparable sales you believe are relevant (with source documentation).
– Ask about turnaround time and whether you’ll receive a copy of the report.
Key takeaways
– An appraisal is a professional opinion of value as of a specific date, based on data, analysis, and judgment.
– Understand the approaches used and check the comparables and adjustments.
– If you dispute an appraisal, document factual errors and follow the lender’s reconsideration or review process.
– Appraisals have limits: they are not inspections, they reflect the effective date, and they depend on data quality.
Sources (for further reading)
– The Appraisal Foundation — Uniform Standards of Professional
Practice note — sources (for further reading)
– The Appraisal Foundation — Uniform Standards of Professional Appraisal Practice (USPAP). Official source for the appraisal profession’s ethics and performance standards. https://www.appraisalfoundation.org/
– Appraisal Institute — professional education, best-practice guidance, and consumer resources for real estate valuation. https://www.appraisalinstitute.org/
– Fannie Mae Selling Guide — appraisal policies and lender requirements used in conforming mortgage underwriting. Useful for understanding lender-side expectations. https://selling-guide.fanniemae.com/
– Consumer Financial Protection Bureau (CFPB) — practical consumer-facing information on appraisals, borrower rights, and dispute procedures. https://www.consumerfinance.gov/owning-a-home/appraisals/
Educational disclaimer
This information is educational and general in nature. It is not individualized investment, legal, or lending advice. For decisions about a specific property, mortgage, or dispute with an appraiser or lender, consult a qualified professional (appraiser, attorney, or loan officer) licensed in your jurisdiction.