What is Appraisal in Real Estate?

What Is a Home Appraisal?

A home appraisal is an assessment of your property’s present market value done by a licensed appraiser. An appraisal helps determine how much you can buy or sell that property based on how much it is really worth. Some sellers would sell their home at an amount that exceeds how much it really is.

For example:

You are interested in buying a house worth $300,000. However, just before the bank approves you for that amount, they would want to know first if it truly is the present market value of the property in question.

Sometimes, property owners base their price on their emotions and sentiments rather than on the actual price as assessed in an appraisal. This process shows the exact condition of the home and what other homes nearby have sold for.

The Purpose of a Home Appraisal

The main purpose of a home appraisal is that an appraisal is the truest basis of the real price of the home based on actual data gathered upon the appraisal. This is essential when applying for a home loan.

The main idea for the appraisal is to avoid situations where buyers or sellers either undersell or oversell, just so it is fair for everyone concerned. This allows all parties to mitigate properly the risk along with the property being bought or sold.

Just because a seller asks for a certain price doesn’t mean the home is worth that much. The appraisal puts a fair, fact-based number on the home. This keeps things balanced.

When Does the Appraisal Happen?

The home appraisal usually happens after the buyer and seller agree on a price—but before the loan is fully approved. It’s one of the last big steps in the home buying process, and it has to be done before closing day.

Once the buyer’s offer is accepted, the lender will order the appraisal. Then, the appraiser will schedule a time to visit the home, look around, and do their research.

If the buyer is paying with cash, an appraisal isn’t required, as it is not legally required if paying cash. But if a mortgage is involved, most lenders will always require it.

What Factors Are Considered in an Appraisal?

Appraisers are professional individuals who, under no circumstances, can just guess the exact price of the property. An appraiser will look into things such as:

• Location: Where the home is matters a lot. Is it in a nice neighborhood? Close to schools, stores, or parks? Where the property is situated, especially near these, will increase the amount of the house.
   
• Size and Layout: The larger the house, the higher the price will be. Even higher when the number of rooms is more than enough for a regular-size American family.
   
• Condition: Homes that are very well taken care of are more expensive, especially when there are no structural damages like cracks on the walls or major structural remodelling involved that degrades their integrity.
   
• Upgrades and Improvements: A good kitchen always increases the appraised value of the house because a kitchen can also be a hot commodity.
   
• Age of the Home: The time from when it was built until the present is also calculated in the appraisal. Time slowly causes damage in the overall structure of the house. Meaning an older house will more likely need a remodel which means even more expenses.
   
• Lot Size: A big yard or extra land can make a home more valuable.
   
• Comparable Sales: The appraiser will compare the surrounding or nearby homes that have been recently sold as one of the bases of market value. You cannot exceed too much in the market value around you; otherwise, it won’t sell.
   
• Market Conditions: Supply and demand will also affect the price of the house. Especially with the increase of inflation, which in turn increases interest rates
   

Appraisal vs. Home Inspection: What’s the Difference?

It’s easy to mix up appraisals and home inspections—but they are very different and serve different purposes.

• An appraisal tells you how much the home is worth.
   
• An inspection tells you what condition the home is in.
   

Think of it this way: the appraiser looks at the home’s value based on facts like size, location, and nearby sales. They’re hired by the lender to protect the bank’s money.

The inspector, on the other hand, checks for problems—like a leaking roof, faulty wiring, or water damage. They’re hired by the buyer to protect the buyer’s investment.

Now here’s where it gets interesting:
Both the appraisal and inspection can affect a home's value—but in different ways.

• A great inspection report (no major issues) can help a buyer feel confident and might even keep the deal moving smoothly. If repairs are needed, the buyer might ask for a lower price or request that things be fixed.
   
• A high appraisal shows the home is worth the asking price or more, which is good for both the buyer and the lender.
   

In short:

• The inspection helps you understand the home’s condition.
   
• The appraisal helps you understand the home’s market value.
   

Both are important tools that help make sure you’re making a smart, safe decision.

What Happens If the Appraisal Is Too Low?

Sometimes, the appraised value comes in lower than the agreed sale price. That can feel like a big problem—but it’s actually pretty common, especially in a hot market.

Let’s say a buyer offers $310,000 for a home, but the appraisal says it’s only worth $290,000. The lender will only give a loan based on the $290,000—not the full offer price. That creates a gap.

Here’s what can happen next:

• The buyer pays the difference in cash (in this case, $20,000).
   
• The seller agrees to lower the price to match the appraisal.
   
• They meet in the middle, splitting the difference.
   
• Either side can walk away if they can’t reach an agreement (depending on the contract).
   

A low appraisal doesn’t always mean the deal is off—but it does mean there’s a decision to make.

What If the Appraisal Comes in Higher Than the Sale Price?

When the appraisal comes in higher than the agreed sale price, that’s great news—especially for the buyer.

Let’s say the buyer is under contract to buy the home for $290,000, but the appraiser says the home is worth $310,000. That means the buyer is getting a home that’s worth more than they’re paying. This is called built-in equity—and it’s like getting a head start in building home value from day one.

For the seller, it shows the home was priced fairly—or maybe even a little low. The deal usually moves forward without any problems since the lender is happy and the buyer feels like they got a good deal.

In short:

• A low appraisal can slow things down.
   
• A high appraisal can speed things up and make the buyer feel confident.

What You Should Remember

• An appraisal is an assessment conducted to determine the current value of your home.
   
• It is usually done by lenders (banks) to get an exact and true amount of what they are about to lend.
   
• The appraiser is a professional third-party who conducts the assessment of the house and gives an unbiased or neutral outcome based on the findings.
   
• A home inspection is different from an appraisal. It checks the home’s condition, while the appraisal focuses on value.
   
• Both the inspection and appraisal matter. One helps you spot problems. The other helps confirm a fair price.
   
• You can renegotiate on the price if the appraisal is too low, and you can also decline the transaction if not in the best interest.
   

If the appraisal is higher than expected, the buyer may start out with extra equity.