What Is a Real Estate Appraisal?

Natasha Khullar Relph
Natasha Khullar Relph

Jan 30, 2024

What Is a Real Estate Appraisal?

In real estate, value is a concept that reigns supreme. Whether you’re a buyer, a seller, a mortgage lender, or an investor, understanding the true value of a property is paramount. 

This is where a real estate appraisal comes into play. A real estate appraisal is a meticulous and impartial evaluation of a property’s worth. Here’s everything you need to know. 

What Is a Real Estate Appraisal?

A real estate appraisal is a professional assessment of the value of a property, typically conducted by a licensed appraiser. A real estate appraisal's primary purpose is to determine a property's fair market value, which is the price a willing buyer would pay and a willing seller would accept in an open and competitive market. Professional appraisals are crucial in real estate transactions because they help lenders, buyers, and sellers understand the property’s worth.

It’s important, however, to differentiate between a real estate appraisal and an inspection. While both involve evaluating a property, they serve distinct purposes. An appraisal determines the property’s market value, whereas an inspection primarily looks at the home's condition and potential issues. Both residential appraisals and inspections are essential steps in the home-buying process, serving different but complementary purposes.

How Much Does a Home Appraisal Cost?

The cost of a home appraisal can vary depending on several factors, including the property's location, size and complexity, and the appraiser’s qualifications. The average single family home appraisal costs $356, according to HomeAdvisor. On average, you can expect to pay anywhere from $300 to $500 for a home appraisal. The cost can be higher in some cases, particularly for larger or high-value properties.

The appraisal fee is typically paid by the party requesting the appraisal, which is most commonly the buyer in a real estate transaction. The responsibility for covering the appraisal cost may also depend on the terms negotiated in the purchase contract. In some cases, sellers may agree to pay for the appraisal as part of the overall transaction, especially in a buyer’s market where competition is fierce. In other situations, the buyer may pay for the appraisal independently, particularly in a seller’s market where the demand for homes is high.

Ultimately, the party responsible for the appraisal cost can be a matter of negotiation and market conditions. Still, clarifying this aspect in the home purchase agreement is essential to ensure understanding.

How Can a Real Estate Appraisal be Helpful for Buyers?

A real estate appraisal can be an invaluable tool for you as a buyer. Here’s how.

  • Determine fair market value: An appraisal objectively assesses a property’s value based on factors like its condition, location, and recent sales of similar homes. This can help you gauge whether the asking sales price is fair and help you negotiate a better deal.
  • Secure financing: Lenders typically require an appraisal before approving a mortgage loan. If the appraised value comes in at or above the purchase price, it reassures the lender that the property is worth the investment, making it easier for borrowers to secure financing.
  • Avoid overpaying: In a competitive real estate market, you may face pressure to bid above asking prices. An appraisal acts as a reality check, ensuring you don’t overpay in the heat of the moment.
  • Budget planning: You can use the appraisal to plan your budget more accurately. Knowing the property’s appraised value helps estimate property taxes, insurance costs, and the down payment required, giving you a clearer picture of what it would cost to purchase the home.
  • Home inspection priorities: The appraisal report may highlight areas of concern within the property, even though it’s not as detailed as a home inspection. You can use this information to prioritize what you want to inspect more thoroughly during the home inspection.
  • Investment decisions: If you’re considering real estate as an investment, an appraisal can provide insights into potential rental income and future appreciation.

How the Real Estate Appraisal Process Works

The real estate appraisal process is a critical step in buying, selling, or refinancing a property. It involves a licensed appraiser assessing the property’s value to ensure it’s fair, accurate, and reflects current market conditions. Here’s how the appraisal process typically works:

  • Requesting the appraisal: The process begins when the buyer’s mortgage lender, the seller, or a homeowner looking to refinance requests an appraisal. An appraiser is then assigned to the property, and they’ll contact the homeowner or their real estate agent to schedule an appointment.
  • Property inspection: The appraiser conducts an on-site inspection of the property. They assess various factors, including the property’s size, condition, age, layout, and any improvements or renovations.
  • Market research: After the property inspection, the appraiser conducts extensive market research to identify similar properties recently sold in the area. These comps help determine the property’s value based on recent sales data.
  • Appraisal report: The appraiser creates a detailed appraisal report using the gathered information. This report includes the property’s estimated value, a description of the property and its condition, photographs, a map of its location, and a summary of the comparable sales.
  • Opinion of value: The appraiser provides an estimated value for the property. This value is crucial for the lender to determine the maximum loan amount they will provide for the buyer.
  • Review and negotiation: In some cases, if there are discrepancies or concerns about the appraisal, such as a low appraisal on a property, there may be a review or negotiation process between the parties involved.

Since April 2023, when obtaining a conventional home loan, you have additional valuation methods to assess a home’s value beyond the traditional appraisal. These alternatives include:

  • Value acceptance: A lender’s provided home value is accepted without a formal appraisal.
  • Value acceptance plus property data: Dispenses with the need for an appraisal but relies on data collected by a third-party property assessor.
  • Hybrid appraisal: A method that involves a partnership between an appraiser and a property-data collector.

What Does an Appraiser Look for During an Inspection?

Here are the key factors they look for:

  • The overall condition of the property, both inside and outside. Factors such as the age and quality of construction, structural integrity, and any needed repairs or renovations.
  • The size of the property, including square footage, the number of bedrooms and bathrooms, and the overall layout.
  • Any improvements or upgrades made to the property. This includes assessing the quality of materials and workmanship and how these improvements impact the property’s value.
  • Specific amenities and features like a swimming pool, fireplace, hardwood floors, or a modern kitchen.
  • Recent sales of comparable properties (comps) in the same neighborhood or area.
  • The neighborhood's proximity to schools, parks, shopping centers, and public transportation and factors such as safety and desirability.
  • Environmental factors like flood zones, environmental hazards, and scenic views.
  • Current housing market trends and conditions, including economic factors impacting the real estate market.
  • Safety features, building code compliance, and the general safety of the property.
  • Compliance with local zoning regulations and legal requirements.

Property appraisal requirements can vary for government-backed mortgages. Government agencies like the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the US Department of Agriculture (USDA) have specific appraisal guidelines and standards that must be followed when obtaining a loan through their programs. For example, the USDA loan program is primarily for homes in rural areas, and the FHA has specific Minimum Property Standards (MPS) that homes must meet to be eligible for an FHA-insured loan. The relevant government agency may also require state-licensed appraisers to conduct the appraisal.

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The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.

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