Property Appraisals

by Nick Gromicko, CMI®

A real estate appraisal helps to establish a property's market value, which is the likely sales price it would bring if offered in an open and competitive real estate market.

Why are appraisals needed?Property appraisals take neighborhoods into account
A property’s value cannot be known without performing an in-depth evaluation by a trained real estate appraiser. In this way, houses are like art and antiques, as their value, too, is unknowable without an appraisal of their flaws and finer points. The monetary amount arrived at by a real estate appraisal can be used for the following purposes:
  • to determine real estate tax. Local governments impose taxes on homeowners based on the valuations offered by appraisers;
  • to determine whether a home is sufficient collateral for a loan to be issued; and
  • to give a seller or real estate agent a better idea of what sale price to list the house.

An appraisal is not performed to assess the safety of a home, however, as this duty is left to inspectors. Assessors might make notations about obvious safety issues that affect the home’s value, such as a crumbling foundation or an unstable deck, but homeowners should rely on InterNACHI inspectors, not appraisers, to help them determine the condition of their homes. Like inspectors, appraisers may be state-licensed, if they have taken certain coursework or received certain certifications, although some states require no certification or licensure -- which is one more reason to hire InterNACHI inspectors, who are among the most educated and trained inspectors in the world.

Real estate appraisers will take one or more of the following three approaches when estimating property value:

  • the cost approach, in which the appraiser estimates how much it would cost to replace the building if it were destroyed. This approach is most helpful for new properties, where the construction costs are better known;
  • the sales comparison approach, in which the appraiser estimates a property's value by comparing it to similar properties nearby that have recently sold; and 
  • the income approach, in which income-generating real estate is appraised based on the rent that it is expected to earn, as well as projected earned profit when the property is resold.

Appraisers determine which of these approaches to emphasize by considering the market for the property. For instance, small retail properties, which are often purchased by owner-users, are best appraised using the sales comparison approach, while office buildings, which are are typically purchased by investors, are best appraised using the income approach. These distinctions are rarely so clear-cut, however, as a single-family home might require some amount of the income approach if it is surrounded by rental properties. Once they have decided which perspectives are most appropriate, the appraiser will collect data, evaluate the neighborhood, verify legal descriptions of the property, note conditions and special features of the home, and perform other duties as they deem necessary to the house’s appropriate valuation.

How do appraisals affect buyers and sellers?

Appraisals have the potential to be damaging to buyers and sellers alike, especially as home prices slide following the end of the housing bubble. In typical circumstances, the buyer and seller agree on a price and the buyer lines up a mortgage, only to have the whole deal collapse when the appraisal comes up tens of thousands of dollars less than the agreed-upon price. In this case, the lender might request that the buyer make a larger down payment to make up the difference between the sales price and the appraised value. If the buyer refuses, s/he may shop for a new lender, ask that the sales price be reduced to fall in line with local market values, or back out of the deal entirely. The buyer may also challenge the appraiser by sharing with them some of the home’s strong points that might have been overlooked, but the appraiser or seller might not budge. Homeowners can also be threatened by inflated appraisals performed for property-tax assessment purposes, as their tax might be somewhat higher than what they had expected to pay when they originally purchased the house. Using the sales price as evidence, the new owner might be able to get their property tax lowered.

In summary, appraisals are used for a variety of purposes, some of which can be influential in the purchase of a home.