How Residential Real Estate Appraisals Work

Male and female real estate appraisers talking and pointing upwards holding blueprints next to ladders

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Appraisals are an important part of the home buying process. A real estate appraisal establishes a property's market value—the likely sales price it would bring if offered in an open and competitive real estate market. Lenders require appraisals when buyers use their new homes as security for their mortgages. An appraisal provides the lender with an assurance that the property will sell for at least the amount of money it is lending.

Don't confuse a comparative market analysis, or CMA, with an appraisal. A CMA is a sales report based on data entered into the multiple listing service, or MLS. Real estate agents use CMAs to help their clients determine realistic asking and offering prices. Appraisals are detailed reports compiled by licensed appraisers. An appraisal is the only valuation report a lender considers when deciding whether to lend the money.

An appraisal is also not the same thing as a home inspection. Home inspectors test appliances and outlets, check the plumbing, and confirm that a home's heating and cooling system is working. Such information is helpful for the buyer to know before moving in. An appraiser, however, is only concerned with valuing a home.

Key Takeaways

  • A real estate appraisal establishes a property's market value; lenders require appraisals when buyers use their homes as security for their mortgages.
  • An appraisal is not the same thing as a home inspection or a competitive market analysis.
  • An appraiser is an objective third party who is licensed by the state after completing licensing coursework and internship hours.
  • Appraisals include details about the property, side-by-side comparisons of similar properties, notations about flawed characteristics, and more.

About Appraisers and Appraisals

  • Appraisers are licensed by states after completing licensing coursework and internship hours.
  • The appraiser must be an objective third party, someone who has no financial or other connection to any person involved in the transaction.
  • The property being appraised is called the "subject property."
  • In some cases, the buyer pays for the appraisal at the time of the loan application. Other times, the appraisal fee is added to the settlement statement and paid at the closing table.

What You'll See on a Residential Appraisal Report

Appraisals are very detailed reports based on an appraiser's on-site evaluation of a property as well as an evaluation of sales data. Here are a few things they include:

  • Details about the subject property, along with side-by-side comparisons of similar properties.
  • An evaluation of the overall real estate market in the area.
  • Statements about issues the appraiser feels are harmful to the property's value, such as poor access to the property.
  • Notations about seriously flawed characteristics, such as a crumbling foundation.
  • An estimate of the average sales time for the property.
  • The type of area in which the home is located, for example, a development or stand-alone acreage.

Residential Appraisal Methods

There are two common appraisal methods used for residential properties: the sales comparison approach and the cost approach.

Sales Comparison Approach

The appraiser estimates a subject property's market value by comparing it to similar properties that have sold in the area. The properties used are called comparables. No two properties are exactly alike, so the appraiser must compare similar properties to the subject property, making adjustments so that their features are in-line with the subject property. The result is a figure that shows the price at which each comparable property would have sold for if it had the same components as the subject property.

Cost Approach

The cost approach is most useful for new properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed.

What Does the Appraisal Mean to You?

A homebuyer's initial mortgage approval is accomplished early on, but final approval usually hinges on a satisfactory appraisal. The lender wants to be sure its investment is covered in case the buyer defaults on the loan. If the property appraises lower than the sales price, the loan might be declined, but that isn't the only hurdle it must pass. Other red flags noted on appraisals include:

  • The estimated time on the market is longer than the area average.
  • Entry to the property is from a private, shared road. The lender might want to see a road maintenance agreement signed by everyone who uses the road, verifying that maintenance is shared by all parties.

These are just a couple of examples of appraisal findings that could stall a home purchase. Lenders study appraisals carefully before determining whether a property qualifies as security for a home loan.

Low Appraisals

Don't panic if the appraisal comes in low because there are steps you can take to make the deal work. If the appraisal uncovers other problems, remember that most problems are correctable. Keep your cool and work through issues one step at a time.

A task force led by the Department of Housing and Urban Development has acknowledged the problem of racial discrimination in home appraisals. Along with several other government agencies, it is conducting an investigation into how to make the appraisal process more fair and equitable for all consumers. If you feel you have been a victim of unfair appraisal practices, the Consumer Financial Protection Bureau provides several resources and ways to file a complaint.

Frequently Asked Questions (FAQs)

How much does a home appraisal cost?

A home appraisal typically costs between $312 and $419, according to HomeAdvisor. The location, size, and condition of your home can all affect the cost of your appraisal.

How long does a home appraisal take?

Although the appraiser only needs a few hours to assess your property in person, the full appraisal process can take several days to a week or more, depending on the appraiser's workload, the size of your home, and the complexity of comps in your area.

How long is a home appraisal good for?

Generally, an appraisal is good for four months from the date on the report. If it's more than four months but less than 12 months old, the appraiser must perform a simple appraisal update. After 12 months, a new appraisal is required in order to secure a mortgage.

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