One of the most important contingencies buyers have in an agreement is the appraisal contingency. Appraisals provide a third-party reality check on the value of (anything really) real estate. If a property doesn’t appraise at value, then a buyer can renegotiate the agreement—as long as the appraisal contingency is in place; my advice is to never waive contingencies or if you do really know what you’re giving up.
An appraisal is a professional opinion of value. That sounds simple enough, but in real estate it can mean very different things depending on why the appraisal is being done.
We’re (probably) all familiar with a home appraisal for a purchase. In a nutshell it shows the bank that the collateral they are leveraging is actually worth that amount of money. For example, a bank will lend 80% of the property’s value and that value is determined by an appraisal. If your offer price is above the appraised value of the property, it’s on you to figure out how to pay the difference.
Appraisals
Appraisals wear a lot of hats in real estate. A purchase appraisal is not the same as a probate appraisal. A divorce appraisal is not the same as a commercial appraisal. The property may be the same, but the reason for the appraisal changes the appraiser’s approach to value.
That is the part most consumers—that means agents too—don’t understand.
At the most basic level, an appraisal helps establish what a property is worth for a specific purpose. That purpose may be a mortgage, an estate settlement, a divorce, insurance, or a commercial investment decision. The appraiser is not guessing. The appraiser is applying accepted standards and using one or more valuation methods to support a conclusion.
Approaches
For homes, the most common method is the sales comparison approach. That means the appraiser looks at recent similar sales and compares them to the subject property. This is the method most people think of when they hear the word appraisal because it is the one most often used in residential lending.
There are two other major approaches too.
The cost approach looks at what it would cost to replace the building, then subtracts depreciation and adds land value. This can be useful for new construction or unusual properties.
The income approach looks at what a property earns. That is the key method for commercial property and rental buildings because investors are buying income, not just walls and a roof.
That distinction matters because a house and a shopping center are not valued the same way.
Types
Consumers also need to know that not all appraisal reports are equally detailed. A full appraisal report includes the most analysis and is the format most lenders want. A restricted report is shorter and used when the client already understands the property. A desktop appraisal uses records and data without a site visit. An exterior only appraisal includes a drive by but no interior inspection.
The report type depends on the assignment. So does the appraiser.
Appraiser Qualifications
Appraisers are licensed individuals and need to work as apprentices under more experienced appraisers. As they gain experience, they are able to appraise different types of properties and properties that have higher values.
Residential appraisals are usually handled by licensed or certified residential appraisers. Commercial appraisals generally require a certified general appraiser and often more advanced experience. In more complex commercial work, the MAI designation is a common sign of deeper expertise.
That is why you should not assume every appraiser does every type of property equally well.
History and Changes
Appraisals also exist because the financial system needs them. The profession grew alongside modern lending in the early twentieth century, and after the 2008 housing crash, federal reforms under Dodd Frank pushed harder for appraiser independence. The goal was to reduce lender pressure and keep value opinions more objective.
That history is important because an appraisal should protect the process, not just one side of it.
End Users
For consumers, the takeaway is straightforward. A low appraisal does not mean your home is bad. A high appraisal does not mean you won the lottery. It means the property was measured against a specific standard for a specific use.
For buyers, it helps explain why a lender may care so much about the number. For sellers, it explains why the price you want and the value a lender supports are sometimes not the same thing. For families settling an estate or dividing property in divorce, it explains why the report may need to be more detailed and more defensible.
If you understand the purpose of the appraisal, the rest of the process makes a lot more sense.
And that is the real point.
This article and many more are available on my www.americasells.com/blog
