How An Appraisal Works

An appraisal is an objective professional opinion on the value of something. While appraisals are mostly associated with real estate, you can also have other property appraised. For example, people often get jewelry or antique appraisals for insurance purposes. Appraisals help you decide how much insurance coverage you need to protect your assets.

For people buying, refinancing, or selling property, appraisals are an important part of the transaction when a mortgage is involved. If someone wants to refinance an existing mortgage, an appraisal can ensure the borrower isn't receiving a loan greater than the worth of their home. Qualified appraisers for real estate must have no interest in the transaction, directly or indirectly.

Example Of An Appraisal

If you are selling your home, you can use an appraisal of your house's value to decide how much to put it on the market. For single-family homes, an appraiser typically uses the Uniform Residential Appraisal Report from Fannie Mae. Overall, an appraiser will consider multiple factors such as:

  • Property location
  • Home condition and what repairs you need in the exterior and interior
  • Features such as amenities, number of bedrooms, and outdoor patios
  • The market value of similar properties in the area

If your buyer is taking out a mortgage to make a purchase, an appraisal is necessary. A bank lending money needs to know they aren't giving more money than the mortgage is valued. In this case, the lender will contact a third-party appraisal management company (AMC) to hire an objective appraiser. However, the buyer must pay for the appraisal.

Significance Of An Appraisal

For small-business, an appraisal of their assets can prove beneficial. It can ensure you choose the right insurance coverage amount, so you receive proper pay-outs for damaged property. You can also evaluate the sales price for an asset you are selling or prevent overpaying for an asset you are buying.

Types Of Appraisals

The main two types of appraisals are for insurance or purchase transactions. These two types of appraisals have notable similarities and differences. An insurance appraisal aims to calculate the cost of replacing an asset if it is lost or destroyed. A purchase appraisal aims to determine the value of an asset for selling and buying.

A purchase appraisal will calculate the fair market value of a home. For example, it will look at the value of a house in its current condition. In contrast, an insurance appraisal determines the value based on similar assets. For instance, an insurance appraiser will calculate the value of similar homes in an area and develop a coverage plan and premium schedule.

Appraisal vs. Market Value

While both result in a value of an asset, there is a difference between the two terms. The market value of something refers to what a buyer is willing to pay for an asset in a free and open market.

In contrast, an appraisal is the objective opinion of a professional appraiser. An appraisal process will consider the market value.

Appraisal vs. Assessment

These two words are not interchangeable. In real estate, an appraisal determines the value of a property at a specific time. For example, an appraiser will use data of recently sold homes within the past 90 days to determine a house in the same area's value.

An assessment is used to determine how much tax you will pay. The town or municipality of the property will set property taxes. Assessors will use numbers from previous fiscal years to calculate a tax assessment.