What Is A Property Appraisal?

A property appraisal determines the market value of a property at a specific time. A licensed or certified appraiser will calculate the value using data on recently sold similar properties within the past 90 days. The appraiser will also consider other details such as the local market trends, neighborhood property values, property conditions, and property features such as fireplaces or decks. The appraisal expert will then determine the value of a property based on the gathered data and their professional judgment.

Property appraisals usually occur when buying, selling, or refinancing. Types of properties that you can have appraised include commercial property, retail buildings, residential homes, farms, and land.

You can ask for property appraisal reports for various purposes such as home loans, tax losses, estates, liquidation, insurance, and net worth. For example, an appraised property value will determine the amount that you may mortgage a property. Mortgage lenders often hire a third-party to make an appraisal to ensure they are not lending more money than the property is worth.

Example Of A Property Appraisal Process

A property appraisal is a significant step when you are planning to buy a home or refinance your mortgage. The entire process usually takes at least a week, and your home appraisal findings will determine how much money you can borrow. According to HomeAdvisor, a home appraisal in the United States costs on average $339.

The first step in getting a property appraisal when buying a home is you must have your offer accepted and sign a purchase agreement. Then your mortgage lender will order an appraisal from a third-party professional. The appraiser will come to the house, inspect the home, and then review additional data before generating a report.

If an appraiser finds your home is worth more than the agreed purchase price, you will be able to finalize your loan terms with the lender. If it's lower than the purchase price, the lender will not lend more money than the home is worth. If this happens, you can choose to pay the difference out-of-pocket or renegotiate with the home sellers to decrease the price.

History Of Property Appraisals

In the United States, one of the oldest private nonprofit organizations that provided professional appraisal services was founded during the Great Depression in 1929. It is called the American Society of Farm Managers and Rural Appraisers (ASFMRA). More organizations were established in the 1930s and after World War II, including:

  • The Appraisal Institute (AI)
  • The American Society of Appraisers (ASA), and
  • The National Association of Realtors

Although these organizations existed, it wasn't until 1989 that the Financial Institutions Reform, Recovery, and Enforcement Act enforced all states in the U.S. to develop systems for licensing and certifying real estate appraisers.

Currently, each state regulates the property appraisal process, with The Appraisal Foundation (TAF) providing the primary standards. The TAF's Appraisal Qualifications Board (AQB) provides minimum standards for appraiser certification and licensing.

A Property Appraisal Value vs. A Market Value

While you can look at both values to determine your property's price, the main difference is that experts determine a property appraisal, and a market value is consumer-driven. The free market value is generally an agreed-upon price that a buyer offers to pay and a seller accepts.

A market value will have more variance than an appraised value, and buyers have more influence over a property's market value. Although an appraised value may indicate a specific number of the property's worth, its market value is the particular number that someone is willing to pay for the property.

For example, you can list your home for $400,000, and a buyer may offer to buy it at $360,000. If you accept the $360,000, the market value of your home is the $360,000 price you and the buyer agreed on even if the property appraisal indicated the property value to be $400,000.

A Property Appraisal vs. A Property Inspection

Both processes are crucial for property sales and purchases. However, they serve different purposes. While the appraisal assesses the home's value, the inspection evaluates the home's condition. An appraiser will consider the home inspection results when determining a property appraisal.

A home inspection will conclude with a report that highlights repair recommendations. During a home inspection, an inspector will review:

  • The property's structure, including walls, ceilings, floors, windows, and doors
  • Appliances
  • Mechanical and electrical systems, and
  • Plumbing

A Property Appraisal vs. A Property Assessment

You can't interchangeably use these two terms as there are distinctive differences. A property appraisal indicates the market value of a specific property at a particular time, and you base the property's value on very recent sale prices. However, to obtain a property assessment, you will look at the past, usually statistics from previous fiscal years.

A property assessment is used specifically for tax purposes. For example, if you sold your property in 2018, the tax assessment will be based on sales from 2016 or 2017. Although it is not something related to the sales or purchase of a property, it is important to note because it is one of the biggest property owner expenses.

A town or municipality will make a property assessment to set property taxes and determine the amount of taxes you will pay for your property. Your county's assessor will calculate the assessment tax, and there is no appraiser involved in making an assessment. The property assessment amount is a percentage of the property's fair market value.