Appraised Value Guide: How Home Appraisals Work

A property's appraised value is determined by a licensed appraiser and typically used to set the conditions of home loans. Unless a new homeowner is making an all-cash purchase, they will need to take out a mortgage loan based on the value of the home. The appraisal process determines that value.

While a home appraisal sets the conditions for a mortgage or home equity loan, it does not necessarily establish a property's current market value. In the retail housing market, appraised values may be used to set an initial asking price, but real estate market conditions and the skill of a real estate agent can also affect the final sale price. In hot real estate markets, a home's market value may exceed its appraised value; in other cases, the market value of the property may never match an appraiser's valuation.

An appraiser is a licensed real estate professional who serves as a neutral third party in the mortgage process. A licensed appraiser performs several services in determining a home’s worth.

• Home inspection: Professional appraisers perform in-person home inspections to determine an appropriate appraisal value. As part of the inspection, the appraiser takes note of the interior and exterior condition of the home; its foundation, roof, and structural integrity; its square footage; its functional layout (number of bedrooms, bathrooms, etc.); and its curb appeal.
• Research: Appraisers research market trends and recent sales of similar homes since pricing is often influenced by the current market value of comparable properties.
• Formal report: When the appraiser is finished with their analysis, they will produce an appraisal report outlining their findings and the final appraised value of the home. These reports typically follow the format standardized by the Uniform Residential Appraisal Report (URAR). The appraiser makes the report available to the current property owner, the potential homebuyer, and potential lenders (such as a commercial bank or a government-backed corporation like Fannie Mae).

A home appraisal can take anywhere from one day to two weeks. The time it takes to complete the appraisal depends upon whether the appraiser considers an income approach (how much a property could be rented for), a cost approach (how much money it would take to build a similar property on a similar parcel of land), a comparative market analysis (how much comparable properties have been selling for), or all three. The comparable sales approach is the easiest to research and tends to take the least amount of time.

The terms "appraised value" and "assessed value" both relate to the overall worth of a property; however, they are determined by different people and serve different purposes.

• Appraised value: The appraised value of a property is set by a licensed appraiser who determines how much the property would be worth on the current market. Home appraisals are used by mortgage lenders to set loan amounts, and they are used by sellers and real estate agents to set an asking price.
• Assessed value: The assessed value of a property is set by a property tax assessor who works for a local government. While assessors consider a property's fair market value as part of their process, assessed value has less bearing on selling price than the appraisal value does.

Neither an appraised value nor an assessed value represents definitive property value on an open market. Depending on local housing market conditions, new home sale prices can exceed tax assessments and professional appraisals.

As you enter the real estate market, there are three crucial things to know about home appraisals.

1. 1. Appraisals are primarily used for mortgage loans and refinancing. Home appraisals carry the most value with mortgage lenders who issue loans to borrowers. Depending on market conditions, a borrower may wish to refinance an existing mortgage down the line. In such cases, a lender may require a reappraisal.
2. 2. The appraised value does not guarantee a purchase price. While appraisers consider the sales price of comparable homes in their reports, a specific home's list price will be the purview of the seller and their real estate agent. In many cases, home purchase prices do match their appraised value and sometimes exceed it.
3. 3. Appraisals do not determine property taxes. Your local tax assessor's office has its own methodology for determining your home’s value. Property taxes are based on their assessment, not on a commercial appraisal.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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