Appraisal

What Is Appraisal?

A real estate appraisal is a professional, unbiased opinion of a property's market value prepared by a state-licensed or certified appraiser. The appraiser inspects the property, analyzes market data, and applies one or more of three recognized approaches to value: the Sales Comparison Approach (comparing the subject property to similar recently sold properties, called 'comps,' and adjusting for differences), the Cost Approach (estimating the cost to rebuild the improvements plus land value, minus accrued depreciation — most reliable for new construction, special-purpose, and unique properties), and the Income Approach (capitalizing the property's Net Operating Income using a market cap rate — used for income-producing commercial and multifamily properties). Most residential appraisals rely primarily on the Sales Comparison Approach, while commercial appraisals emphasize the Income Approach. Appraisals are required by federally regulated lenders (under FIRREA) for most mortgage transactions to ensure the property's value supports the loan amount. The appraisal report is ordered by the lender through an Appraisal Management Company (AMC) and the report is used by the lender, though the borrower pays the appraisal fee (typically $400–$700 for a standard residential appraisal). The standard residential appraisal form is the URAR (Uniform Residential Appraisal Report, Form 1004).

Appraisal Formulas

Why Appraisal Matters

The appraisal is often the most consequential step in a real estate transaction after the contract is signed. If the appraisal comes in at or above the purchase price, the deal moves forward smoothly. If it comes in below the purchase price, the buyer faces a gap that must be resolved — often the most stressful negotiation point in the entire transaction. For the exam, appraisal is one of the most heavily tested topics because it connects property valuation, comparable sales, the three approaches to value, LTV calculations, and lender requirements. Understanding appraisals also helps you explain to clients why their home may not be worth what they believe — a core skill for practicing real estate agents.

Key Factors That Affect Appraisal

• 1.Comparable sales quality is the most important factor in a residential appraisal. Appraisers look for comps that are recent (sold within 3–6 months), nearby (same neighborhood or comparable area), and similar in size, age, condition, and features.
• 2.Appraiser adjustments correct for differences between comps and the subject. If a comp has a feature the subject lacks (like a pool), the comp's price is adjusted DOWN. If the subject has a feature the comp lacks, the comp's price is adjusted UP. Adjustments are always made to the comparable, never to the subject.
• 3.Market conditions at the time of the appraisal matter. In a rapidly appreciating market, even recent comps may understate current value. In a declining market, comps may overstate it. Appraisers may apply a time adjustment.
• 4.Property condition directly affects value. Significant deferred maintenance, functional obsolescence (outdated floor plan), or external obsolescence (noisy highway nearby) will reduce the appraised value.
• 5.The appraisal must be independent. Under the Dodd-Frank Act and FIRREA, lenders cannot pressure appraisers to hit a specific value. Appraisal Management Companies (AMCs) act as intermediaries to maintain independence.

Appraisal vs. Related Metrics

Frequently Asked Questions About Appraisal

Terms Related to Appraisal

More Property Valuation & Investment Terms