An appraisal in real estate is an estimate of the fair market value of a property. This estimate is based on an appraiser’s professional opinion and is typically used for a real estate transaction, such as a sale, purchase, or mortgage financing. Keep reading to learn more about real estate appraisal definition, including how an appraisal typically works and the parts of an appraisal report.
Appraisal Definition
The definition of an appraisal is “a valuation of property by the estimate of an authorized person.”
When a property is for sale, it’s important that someone not connected directly to the real estate transaction determines that the property’s price is appropriate. This is the main reason for an appraisal report.
An appraiser creates a report based on an in-person inspection, research into recent sales of similar properties, current market trends, and property details. The following factors play a vital role in the value of the property:
- the size of the property
- the condition of the property
- the property’s floor plan
- the property’s amenities
It’s important to note that appraisals are not the same as inspections. While an appraisal assesses the value of a property, an inspection is a more detailed examination of the property’s physical condition.
What Is in an Appraisal Report?
While the specific format and content of an appraisal report may vary, here is some general information you could expect to find in the report from a professional appraiser.
1. Property Description
An appraisal report includes a property description, including the address and the legal description of the property, including the size, layout, and any unique features.
2. Neighborhood analysis
You’ll also find an assessment of the local neighborhood and market conditions that may impact the property’s value, such as supply and demand and local economic factors.
3. Comparable sales data
Often referred to as “comps,” comparable sales data will be included in the appraisal report. This data is used when the appraiser uses a sales comparison approach, which means the value will be based in part on recently sold comparable properties.
4. Adjustments
In the adjustment section of an appraisal report, the appraisal will account for differences between the appraised property and the comp properties. For example, a home that has been immaculately maintained may be appraised more than one that has not.
5. Photos
You’ll find interior and exterior photos in a property appraisal report. The report will also include photos of each comparable property.
Besides this information, you may find zoning information, an evaluation of the land, and a statement from the appraiser outlining the assumptions made and any limitations on the appraisal process in the report.
What Is the Purpose of an Appraisal Report?
Many professionals involved in real estate transactions use an appraisal report. However, the reports are also used by professionals outside the industry.
Here are some of the reasons an appraisal report may be necessary.
1. An appraiser’s report helps determine a property’s fair market value.
A property’s fair market value is the price at which a willing and informed buyer would likely purchase the property from a willing and informed seller, with neither party under any undue pressure to complete the transaction.
2. An appraiser’s report helps the lender make informed decisions about mortgage loans.
Lenders use appraisals to make informed decisions about mortgage loans so that the mortgage company does not lend more money for a property than it is worth.
3. An appraiser’s report can guide the buyer or seller.
Sellers and their agents can use an appraiser’s report to set an appropriate listing price for a property. Buyers can use appraisals to ensure that the purchase price is reasonable. Either party can also use the report during the negotiation process.
4. Government agencies often require appraisal reports.
Many lending institutions, especially those regulated by government agencies, require appraisals to comply with lending guidelines and regulations.
5. Appraisal reports are used for legal and tax purposes.
Appraisal reports are used for estate planning, property tax assessments, or divorce settlements.
6. Real estate investors use appraisal reports to make decisions about a property.
An appraisal report will help an investor decide to buy, sell, or hold a property.
7. Insurance companies use appraisal reports.
Insurance companies use appraisal reports to determine the replacement cost of a property.
8. Appraisal reports can be used as evidence in legal proceedings.
An appraiser’s report can be used as evidence in property disputes, eminent domain, or other legal matters.
As you can see, an appraiser’s report is crucial to buyers, sellers, lenders, government agencies, insurance companies, and real estate agents.
How the Appraisal Process Works
You may wonder about the relationship between a real estate agent and an appraiser.
As a seller’s agent, you will use your knowledge of the local market and recent comparable sales (comps) to help sellers determine an appropriate listing price for their property.
When a buyer makes an offer on your client’s property, the buyer’s mortgage company will select an appraiser to complete a report. The lender will pay for the appraiser’s report. However, those costs will be passed on to the buyer when they pay closing costs.
It’s important to note that lenders must maintain a separation between their loan origination staff and the appraisers to ensure the independence and impartiality of the appraisal process.
As the seller’s agent, you will facilitate the appraiser’s access to the property. You may also provide the comps you used to determine the asking price and share information regarding recent improvements or features that could impact the property’s value.
Once the report is complete, buyers’ and sellers’ agents will use the appraiser’s report to negotiate the property’s price.
FAQs About Real Estate Appraisals
One part of your role as a real estate agent is to educate your clients about the appraisal process. Here are some general questions about real estate appraisals you or your clients may have.
What happens if the appraisal comes in too low?
There are several repercussions if a real estate appraisal is lower than the agreed-upon purchase price. If this happens, however, you can reassure your client that there are several ways to remedy the situation.
- Renegotiate the purchase price: The parties may agree on a new price that reflects the appraised value.
- Bigger down payment: Lenders typically finance a percentage of the appraised value. If a buyer wants to continue with the transaction, they can put more cash down for the property.
- Dispute the appraisal: In some cases, a buyer or seller may dispute the appraisal if they believe there were errors in the report. A homeowner or interested party can request a reappraisal or a second opinion.
- Cancel the deal: The lower-than-expected appraisal may cause one or both parties to back out of the deal.
What is appraisal bias?
Appraisals are completed by professional, highly trained, and licensed individuals. However, they sometimes bring personable biases or subjective judgments into the valuation process.
For example, more discriminatory appraisals have been uncovered in the past few years. The Biden Administration released the PAVE Action Plan to address and eliminate such biases.
PAVE stands for Property Appraisal and Valuation Equity. The published action plan spotlights undervaluations that occur in Latino and Black neighborhoods. If you suspect discrimination could contribute to a low appraisal, raise your concerns with the lender.
How much is an appraisal report?
An appraisal report typically costs between $350 to $400, but it may cost more based on the size and condition of the property – and the level of detail needed.
What is a real estate agent’s role in the appraisal appointment?
A real estate agent schedules the appraisal and gives the appraiser access to the property. They may also provide information about the property, such as recent improvements, upgrades, or unique features that could impact the value. A REALTOR® may also share comps with the appraiser and address any questions an appraiser has about the property.
For more information about appraisal reports in real estate, read the National Association of REALTOR’s Guide to Understanding Residential Appraisal.
If you are ready to enroll in real estate classes to earn your license, consider Colibri Real Estate. Colibri Real Estate (formerly Real Estate Express) is an industry leader in pre-license education. Our packages include real estate exam prep materials that will help you prepare for your licensing exam.
If you want to become a real estate appraiser, learn more about the process from McKissock Learning. Over 100,000 appraisers have trusted McKissock to deliver the courses that advance their careers. We’ve provided quality pre-licensing real estate education for over 30 years and can help you with your career change.
Sources:
- “Appraisal Definition & Meaning.” Merriam-Webster. Accessed December 4, 2023. https://www.merriam-webster.com/dictionary/appraisal.
- “A Guide to Understanding a Residential Appraisal.” www.nar.realtor, November 28, 2013. A-Guide-to-Understanding-Residential-Appraisal-03-28-13.pdf (nar.realtor)
- Fontinelle, Amy. “What Is a Home Appraisal?” Investopedia. Accessed December 4, 2023. https://www.investopedia.com/articles/pf/12/home-appraisals.asp.
