Real Estate Appraisal
An independent professional estimate of a property's fair market value, required by lenders before approving a mortgage.
What is Appraisal?
A real estate appraisal is an objective, independent estimate of a property's fair market value conducted by a licensed or certified appraiser. Lenders require appraisals before approving a mortgage to ensure the loan amount does not exceed the property's actual worth—protecting the lender if the borrower defaults. Appraisers inspect the property, analyze comparable sales (comps), consider the property's condition, location, and features, and produce a written appraisal report supporting their concluded value. Three appraisal approaches exist: the sales comparison approach (comparing to recent sales), the cost approach (estimating replacement cost minus depreciation), and the income approach (capitalizing rental income, used for investment properties). If the appraised value comes in below the purchase price, the buyer must renegotiate, increase the down payment, or terminate the contract.
Example
A buyer agrees to purchase a home for $500,000 and applies for a $400,000 mortgage. The lender orders an appraisal, which returns a value of $480,000. Because the lender will only loan up to 80% of the appraised value ($384,000), the buyer faces a shortfall: they must either renegotiate the purchase price down to $480,000, increase their down payment by $16,000, or exercise an appraisal contingency to exit the contract. Low appraisals are one of the most common causes of delays and renegotiations in residential real estate transactions.