Valuation
What Is a Real Estate Appraisal?
A real estate appraisal is a professional opinion of a property's market value, conducted by a licensed or certified appraiser following standardized methodologies (USPAP — Uniform Standards of Professional Appraisal Practice). Lenders require appraisals before funding mortgages to confirm the collateral value supports the loan amount.
Three Approaches to Value
Sales Comparison Approach
Compares the subject property to recently sold comparable properties, making adjustments for differences. The primary method for residential property. Most reliable when good comps exist within the same market area.
Cost Approach
Estimates land value separately from improvement value. Improvement value = replacement cost new minus depreciation. Most useful for new construction, special-purpose properties, and insurance valuations.
Income Approach
Values property based on income-generating potential. Property Value = NOI ÷ Cap Rate (direct capitalization) or by discounting projected future cash flows. Primary method for commercial and income-producing properties.
Appraisal FAQ
What happens if the appraisal comes in lower than the purchase price?
If an appraisal contingency is in place, the buyer can: (1) Renegotiate the purchase price down to the appraised value. (2) Pay the difference out of pocket (bridge the 'appraisal gap'). (3) Exit the contract with earnest money returned. In competitive markets, buyers sometimes waive the appraisal contingency, accepting the risk of paying more than appraised value.
Who orders and who pays for the appraisal?
The lender orders the appraisal to ensure its independence (required under federal law since 2008 HVCC regulations). The buyer typically pays for the appraisal at closing or at time of service — costs range $400–$750 for residential, higher for complex or large properties.
Can sellers or buyers challenge an appraisal?
Yes — this is called a 'reconsideration of value' (ROV). If the appraiser used incorrect comps, made factual errors, or missed significant improvements, an agent or lender can submit a formal ROV with supporting documentation. The appraiser is required to consider the additional information but is not required to change the value conclusion.
What is the difference between an appraiser and an assessor?
An appraiser is a private professional who provides market value opinions for lending, legal, and estate purposes. An assessor is a government official who determines assessed value for property tax purposes. Assessed value often differs from market value — assessments may lag, use formulas, or have statutory limitations. Both are legal distinctions frequently tested on licensing exams.
Related Resources
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