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What is an Appraisal?

How Does It Work?
When Do I Need One?
What Is the Process? 

First, Some Definitions

  • An appraisal is the act or process of developing an opinion of value.
  • Real estate appraisal is the practice of developing an opinion of value about real property, expressed as a value (or sometimes as a range of value) usually known as Market Value.
  • Market Value is defined as “the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus”).

How Does It Work?

To understand the field of real estate appraisal, let’s go back to the start of the real estate profession itself, when anyone could call themselves a real estate appraiser. Until recently, most real estate appraisers who were practicing professionals were members of private national organizations, such as the Appraisal Institute and the American Society of Appraisers. However, in 1989 and 1991, Congress passed reform legislation requiring states to license and regulate appraisers and the mortgage industry in general. (For more information about California’s Office of Real Estate Appraisers, click here.)

Since then, each state has created a monitoring agency that oversees appraisers, though all states require appraisers to conform to national standards that are found in the Uniform Standards of Professional Appraisal Practice (for more information, click here).

Establishing the value of real property is not like determining the value of a carton of milk, because no two parcels of real property are exactly alike. And, because you want to determine the value of real property you are currently or prospectively interested in, it is important that you receive accurate information from a knowledgeable expert. An appraisal is NOT a Comparable Market Analysis (done by a real estate agent to determine the best selling price for a home) NOR a home inspection (done by a licensed contractor to evaluate the condition of the structural and mechanical systems of a home).

In general, there are three approaches to value: cost, income, and the sales comparison approach. In general, residential real estate utilizes the last of these three approaches, which allows a professional appraiser to determine the value of a home by comparing it to recent and nearby sales of other similar homes.

When Do I Need One?
There are a myriad of reasons why you would need a real estate appraisal, but here are the main ones:

  • Buying a home (be it a single family attached or detached home, condominium or townhome) or a multi unit, mixed use, or  commercial property
  • Refinancing an existing mortgage
  • Acquiring an equity line (line of credit) from a bank or private lender
  • Divorce
  • Death in the family
  • Donations, insurance, investments
  • Tax appeal or removing Private Mortgage Insurance (PMI)

What Is the Process? 
The process of appraising a home can be divided into three parts:  

Part 1: Information-gathering. First, the appraiser is contacted by a client desiring to find out the value of a specific property. The appraiser and the client agree to a set of terms concerning the scope of work, and a report is ordered. Under national guidelines, the client is almost always defined as that person or entity that orders the report, which means that in many cases, the person paying for the report is not the client. This is most typically true in the case of a borrower who is purchasing a home or refinancing an existing mortgage, wherein the client is the bank (and not the borrower), and the appraiser is usually prohibited from giving the appraisal report directly to the borrower.

The appraiser then gathers as much information as he can about the property. In some cases, the appraiser will ask the client and/or homeowner to provide him with some specific information, such as a title report, sales contract (for a purchase), building plan, list of recent improvements, etc. He also makes provisions to access and inspect the property, either by calling the borrower directly, or in the case of a purchase, the appropriate real estate agent.

Part 2: On-site Inspection. Next, the appraiser measures the outside of the home and fully inspects the interior of the home, noting condition, improvements, amenities, views, etc. Usually, the appraiser also discusses recent improvements to the home, and asks about current problems. Many borrowers find it useful to have a complete written list of improvements and permits ready for the appraiser to review. The appraiser will also take pictures of both the inside and outside of the home, and a picture of any relevant amenity such as a pool or view.

Part 3: Writing and Delivering the Report. In writing the report, most appraisers utilize standard forms that are approved by governmental agencies and add addenda such as photos, maps, etc. (For an example of a form used to report the value of a typical single family detached home, click here.) In addition to providing the reader with a complete and accurate description of the subject property, the appraiser also determines the value of the subject by analyzing recent sales of similar homes in the same or nearby neighborhoods. These similar sales are analyzed, and their sales prices are adjusted by the appraiser to account for differences between them and the subject property, which allows the appraiser to develop an opinion of value. The report is completed and sent to the client (in the 21st century, this is normally done electronically via e-mail).

Remember that an appraisal is an opinion of value at a specific point in time, based on what other similar properties like the subject have sold for in the very recent past. Because the real estate market is always fluid, the appraiser’s opinion of value may or may not be the figure that a home can be sold for in the future, as there are usually other factors that go in to the sale of a home (e.g., seller or buyer motivation, interest rates, inventory). A real estate appraiser does not determine value; only the market determines value. But a good appraisal does give the client an accurate idea of what the value of a property is at a specific point in time, and allows people to make informed decisions based on reliable information.

For a complete understanding of the real estate appraisal profession, you can purchase a copy of the most current edition of “The Appraisal of Real Estate” from the Appraisal Institute or