What Is a Real Estate Appraisal

A real estate appraisal is an unbiased professional opinion of a home's value. Appraisals are required by lenders when:

• Buyer is financing the purchase with a mortgage
• Refinancing a property
• Appealing property taxes
• Settling estates/divorces
• Removing PMI (private mortgage insurance)

Appraisals differ from assessments (tax purposes) and CMAs (real estate agent's estimate).

Why Appraisals Matter

For Buyers

• Lender requires appraisal to approve loan
• If appraisal comes in LOW, deal may fall through
• Buyer may need to make up difference in cash
• Buyer can renegotiate with seller
• Buyer can walk away with earnest money returned

For Sellers

• Low appraisal can kill the deal
• Need to price home correctly upfront
• Prepare home to maximize appraised value
• May need to reduce price if appraisal is low

For Investors

• Appraisal is reality check on purchase price
• Affects refinance + 1031 exchange
• Required for portfolio loans
• Cash buyers can skip appraisal (but should get one anyway)

How Appraisals Work

Step 1: Lender Orders Appraisal

• Buyer pays ($400-700 typically)
• Lender chooses appraiser (independent)
• Buyer cannot choose appraiser
• Appraisal is owned by lender (buyer gets copy)

Step 2: Appraiser Inspects Property

• 30-60 minutes on-site
• Measures square footage
• Notes condition + features
• Takes photos (interior + exterior)
• Inspects basement, attic, garage

Step 3: Appraiser Researches Comparables

• Searches MLS for last 3-6 months of sales
• Within 0.5-1 mile radius
• Similar size/age/condition
• Adjusts for differences (pool, view, updates)

Step 4: Appraiser Determines Value

Three approaches:

1. Sales Comparison (most common for residential)
2. Cost Approach (replacement cost)
3. Income Approach (for rentals)

Step 5: Appraisal Report Delivered

• 2-7 days after inspection
• Sent to lender (not directly to buyer)
• Lender forwards copy to buyer
• Valid for 4-6 months

Appraisal Costs

Single Family Home

• Standard: $400-700
• Luxury: $700-1500
• FHA/VA: $500-800 (stricter requirements)
• Multi-family: $700-1500

Commercial/Investment

• Small commercial: $1500-3000
• Large commercial: $3000-10000+
• Apartment complexes: $5000-25000

Factors Affecting Cost

• Property value (luxury costs more)
• Property type (multi-family costs more)
• Location (rural areas cost more)
• Loan type (FHA/VA cost more)
• Appraiser experience

How to Prepare for an Appraisal

For Sellers

1. Clean + declutter — first impressions matter
2. List all upgrades — give appraiser the list
3. Provide comparable sales — but don't be pushy
4. Fix obvious repairs — leaky faucet, broken light
5. Make beds + tidy
6. Disclose all known issues — don't hide problems
7. Provide HOA docs if applicable
8. Show property survey if available
9. Provide list of recent improvements with costs

For Buyers

1. Review appraisal report carefully
2. Ask lender to explain any questions
3. Compare to comparable sales
4. Challenge appraisal if clearly wrong
5. Order second appraisal if needed (cost +$500)

What Appraisers Look For

Property Characteristics

• Square footage (measured)
• Lot size
• Bedroom + bathroom count
• Year built
• Construction type + quality
• Basement type (finished vs unfinished)
• Garage size + type
• HVAC system + age
• Roof type + age

Condition + Features

• Overall condition (1-5 rating)
• Updates + renovations
• Kitchen quality
• Bathroom quality
• Flooring type
• Paint condition
• Appliances (built-in vs personal)
• Window quality
• Energy efficiency features

Location Factors

• Neighborhood quality
• School district
• Proximity to amenities
• Traffic noise
• View
• Waterfront (huge premium)
• Corner lot vs interior lot
• Busy street vs quiet street

Appraisal vs CMA vs Assessment

Feature	Appraisal	CMA	Assessment
---	---	---	---
Purpose	Loan approval	Pricing	Property tax
Who does it	Licensed appraiser	Real estate agent	Tax assessor
Cost	$400-700	Free	Free
Accuracy	High	Medium	Low
Used by	Lenders	Sellers/buyers	Tax authorities
Frequency	Per transaction	Per listing	Annually

Common Appraisal Issues

Low Appraisal

Cause: Sale price higher than appraised value Impact: Buyer can't get full loan amount Solutions:

1. Seller reduces price
2. Buyer brings more cash
3. Negotiate middle ground
4. Order second appraisal
5. Walk away with earnest money returned

High Appraisal

Cause: Sale price lower than appraised value Impact: Buyer gets instant equity Action: Close the deal (gift horse)

Appraisal Conditions

Cause: Appraiser notes repairs needed Impact: Lender requires repairs before closing Solutions:

1. Seller makes repairs
2. Buyer + seller renegotiate
3. Lender may waive minor conditions
4. Walk away if major issues

How to Challenge an Appraisal

When to Challenge

• Appraisal is 5%+ below contract price
• Appraiser used wrong comparables
• Appraiser missed significant features
• Appraiser is from outside area (unfamiliar)

How to Challenge

1. Review appraisal report carefully
2. Find better comparables (recent sales, similar homes)
3. Document errors (wrong square footage, missed features)
4. Submit reconsideration of value to lender
5. Lender reviews and may request appraisal revision
6. Order second appraisal if first was wrong (cost: $500+)

Success Rate

• ~25% of challenges result in higher value
• Need solid evidence (better comparables)
• Cannot challenge just because you don't like the number

FHA Appraisals (Stricter)

Additional Requirements

• Safety issues must be fixed before closing
• Handrails on all stairs
• No peeling paint (built before 1978)
• Working utilities
• No structural issues
• Adequate access to attic + crawl space

Common FHA Appraisal Failures

• Peeling paint
• Missing handrails
• Broken windows
• Leaky roof
• Foundation cracks
• Electrical issues

VA Appraisals (Even Stricter)

Additional Requirements

• VA Minimum Property Requirements (MPRs)
• Must be move-in ready
• No major deferred maintenance
• Adequate heating
• Safe water + sewage
• Termite inspection (free in some states)

VA Appraisal Process

• VA assigns appraiser (not lender)
• Appraiser uses VA portal
• Notice of Value (NOV) issued
• Buyer can challenge NOV

Investment Property Appraisals

Income Approach

For 2-4 unit properties:

• Appraiser analyzes rental income
• Uses Gross Rent Multiplier (GRM)
• Calculates NOI (Net Operating Income)
• Capitalizes income to value

Cap Rate Calculation

Cap Rate = NOI / Property Value

• NOI = Gross Income - Operating Expenses
• Higher cap rate = lower value
• Lower cap rate = higher value

Key Takeaways

• Appraisals are unbiased professional opinions of value
• Required by lenders for financed purchases
• Cost: $400-700 for single family homes
• 5-step process: order → inspect → research → value → report
• 3 approaches: sales comparison, cost, income
• Sellers should prepare home + provide improvement list
• Low appraisal: renegotiate or walk away
• High appraisal: instant equity for buyer
• Challenge appraisal if 5%+ below contract price
• FHA/VA appraisals have stricter requirements
• Income approach used for multi-family properties
• Cap rate = NOI / Property Value
• Appraisals are valid for 4-6 months
• Buyer pays for appraisal but lender owns it
• Appraiser is independent (no conflict of interest)
• Following this guide = understand appraisal process + avoid common pitfalls