Appraisals might seem a bit mysterious, but appraisers follow a pretty strict process when assigning a value to a property. Let's talk about it!
What Is an Appraisal?
An appraisal is an impartial, qualified appraiser's opinion of the value of a specific property as of a particular date, supported by relevant market information. Appraisals can be used for almost any type of property and can be ordered for various purposes.
Most commonly, a lender orders an appraisal to determine the current value of the property they're considering making a loan on. This ensures that if the borrower defaults on the loan, the lender can recoup its losses.
Appraisals are used for both home purchases and refinances.
Who Can Perform an Appraisal?
An appraisal can only be performed by a licensed appraiser. While the licensure process differs from state to state, the appraiser must have the licensure required by the state. Real estate agents can offer their opinions of value (like in a CMA), but that is not an appraisal.
FIRREA
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) created the first federal oversight of appraisers. FIRREA mandates that states regulate and license appraisers.
FIRREA officially recognizes The Appraisal Foundation, a nonprofit comprised of representatives from major appraisal organizations, as the source of appraisers' professional standards and qualifications for licensing. The Appraisal Foundation helps states decide how to regulate their appraisers and has created this handy guide to understanding consumer appraisals.
Who Chooses the Appraiser?
Appraisals can be ordered for any number of reasons, but if a lender is ordering the appraisal to decide whether or not to make a loan to purchase (or refinance) a property, the lender will choose the appraiser.
While they get to choose the appraiser, the appraiser can't be affiliated with the lender. That would be a conflict of interest.
How Much Does an Appraisal Cost?
Appraisers charge a fee for their services. The cost of an appraisal differs from market to market and depends on the property's size. A single-family home appraisal typically costs you between $300 and $500. And while the lender chooses the appraiser, the fee comes out of the buyer's pocket.
How It Works
To value single-family residential properties, an appraiser looks at similar, recently sold properties (known as comps) to determine a property's value. This is known as the sales comparison approach. When valuing other types of properties, like commercial properties, they may use a different approach, like the cost or income approach.
When doing an appraisal, the appraiser examines the property to ensure it is compared to similar properties in size, age, condition, and location. After they complete their analysis, they create an appraisal report and send a copy to the lender and the buyer.
If you think that sounds like a comparative market analysis (or CMA), you're not wrong! They are similar processes, but there are a few differences. Check out this chart: 
Uniform Standards of Professional Appraisal Practice (USPAP)
Appraisers use a standard approach to their practice to ensure that every appraiser approaches every property similarly. The goal is to create a level playing field for borrowers and sellers. This standard approach is called the Uniform Standards of Professional Appraisal Practice, or USPAP. According to The Appraisal Foundation:
"The Uniform Standards of Professional Appraisal Practice (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States.
USPAP was adopted by Congress in 1989 and contains standards for all appraisal services, including real estate, personal property, business, and mass appraisal. Compliance is required for state-licensed and state-certified appraisers involved in federally related real estate transactions.
USPAP is updated every two years so that appraisers have the information they need to deliver unbiased and thoughtful opinions of value."
How an Appraiser Assigns Value
Want to get the nitty-gritty on how appraisers assign value? There's an eight-step process. Take a look:
The Appraisal Report
Fannie Mae and Freddie Mac developed a standard appraisal report known as the Uniform Residential Appraisal Report (URAR). While this form isn't legally required for an appraisal, appraisal reports almost always use it.
It lists all kinds of information about the property, neighborhood, purpose of the appraisal, and, most importantly, the value assigned by the appraiser. It must contain a map, a sketch of the exterior, images of the property, a description and pictures of the comps, an explanation of how the square footage was calculated, and more.
How Long Does the Appraisal Take?
The appraisal visit itself usually won't take more than an hour. The appraiser will have compiled much of the necessary information before they come for the visit (though they may do this afterward).
When you're scheduling an appraisal, make sure to find a time that works for the seller. Neither the buyer nor the seller needs to be present for the appraisal.
Typically, it'll take seven to 10 days to get the report back.
What Value Are You Hoping for?
A lender will want to see an appraised value that is at least as much as the amount the borrower is trying to borrow. They want to know that if they have to foreclose on the property and sell it, they can recoup what they've lent the buyer.
Ideally, the property would appraise for the sale price. Otherwise, the buyer would be paying more for the property than the appraiser believes it is worth.
If the Appraisal Comes in Too Low
Sometimes, an appraisal comes in lower than the loan amount the buyer is seeking. In that case, the lender will not be able to approve the loan. It's not necessarily a deal killer, though. There are a few options for resolving the issue:
- The seller could lower the sales price. Sometimes, a motivated seller will be willing to lower the home's sale price enough that the buyer will only need to borrow the appraised amount.
- The buyer could make up the difference in cash. Another option is that the buyer can put more cash down. This, similarly, means that the loan amount will be smaller. Of course, this option only works if the buyer has extra cash (and they're willing to pay more than the appraised value of the home).
- The buyer can request a reappraisal. If the parties think the appraisal was incorrect, they can ask another appraiser for a second opinion. Appraisers are human beings, and there will be some variation between their assessments.
- The seller can challenge the appraisal. The seller can request a reconsideration of value (ROV), but only if there was a factual error with the appraisal report. Be sure to read the report carefully if it comes in low. It's possible the appraiser made a mistake.
- The buyer can cancel the contract if there is an appraisal contingency. If there was an appraisal contingency in the contract, the buyer can cancel the contract if the appraisal comes in low. If there is a financing contingency (which is very common), the buyer can cancel the contract because they can't obtain financing due to the low appraisal.
Appraisal and Bias
A recent study by Freddie Mac found that homes owned by Black and Latino homeowners routinely appraised for less than similar homes owned by white homeowners. This "appraisal gap" could be the product of unconscious bias on the part of appraisers. If you suspect this could contribute to a low appraisal, seek a reappraisal. You can also talk to the lender who ordered the appraisal about your concerns.
What's Your Role in the Appraisal Process?
Agents don't do appraisals, so what should you do during the appraisal process? Agents have a few jobs when it comes to appraisals.
Number one is to help with the scheduling. If you're a buyer's agent, work with the seller and their agent to ensure the appraiser has access to the property at the right time. Make it easy for the appraiser to schedule the appraisal. Delaying an appraisal can slow the financing process and cause you to push back the closing date.
If you're a seller agent, talk to your seller about presenting the property's best face to the appraiser. No, dirty dishes in the sink won't lower the appraisal value, but getting a higher appraisal is in their best interest. Making the property a beautiful and welcoming place doesn't hurt!
Should You Go to the Appraisal?
Some seller agents like to be present for the appraisal to chat with the appraiser and show them the property. Some even bring comps to share with the appraiser. While the appraiser won't necessarily use the supplied comps, it doesn't hurt to make their job easier. Anything you can do to help the appraiser understand why you, the agent, believe the property to be worth a certain amount helps your chances of getting an appraisal for the right amount.
Especially in areas where home values are rising rapidly, you want the appraiser to be looking at the most recent comps. In some markets, comps that are only a few months old will already be out of date in terms of current home values. You need that appraisal to come in high enough to get the deal done!
Emotional Support
Finally, whether you're a buyer or seller agent, your job is to be emotional support for your client. Getting a loan is stressful and full of annoying paperwork. If you're the buyer agent, help keep your client on track by providing documentation to the lender so they can get their financing in place by the deadline.
Sellers can feel stung by an appraisal lower than they expected. Remind them that it's not personal. As long as it appraises high enough to close the deal, they should be happy.
Updated 12/5/24