A home appraisal is usually calculated by comparing recent sales of similar homes or assessing the cost of building the property. For residential properties, the comparative sales approach is the most commonly used method.
Mortgage financing from lenders is usually conditional on getting an appraisal, so you need to understand appraisals if you’re buying a home.
Pricing the house well (for sellers) and submitting a reasonable but competitive offer (for buyers) are the best ways you can work to mitigate any appraisal issues well before closing. If you don't have help from an expert agent, use Clever's network of top real estate agents all over the country to find one in your neighborhood who can get your transaction to the finish line with no bumps in the road. Take a short quiz now to get started!
How appraisers calculate your home’s value
Appraisers use three primary approaches to appraise the value of properties. Each approach focuses on a different metric to derive a fair market estimate of the property that the buyer and seller agree on:
- Sales comparison → Comparison with similar properties (residential properties)
- Cost → The cost of reproducing the property (new builds and atypical properties)
- Income capitalization → How much income the property generates (investment properties)
The typical appraisal process takes anywhere between one and three weeks, depending on the property's complexity, market conditions, and appraiser’s workload. Generally, the lender hires the appraiser through an appraisal management company (AMC).
An appraisal report will usually include the following:
- Description of the property
- Location and market analysis
- Appraisal valuation process
- Photographs and supporting documentation
- The property’s estimated value
The lender uses the appraisal to calculate and determine the maximum loan amount for which you can be approved.
Sales comparison approach
A sales comparison approach is the most common method and involves comparing the property with other similar properties that have recently been sold. By looking at similar properties in the neighborhood and analyzing their sales price, the appraiser can derive an appropriate fair market value.
The sales comparison method is the most widely used appraisal approach for residential properties.
Properties that have recently sold, also called “comps,” share similar features, such as:
- House style
- Square footage
- Lot size
- Location and neighborhood
- Number of bedrooms/bathrooms
- Other amenities (e.g., appliances)
Typically, the appraiser will consider the sales prices of three or four comparable properties and make adjustments for the specific property in question based on the different features.
Say that a comparable property sold for $350,000 in the same neighborhood recently. This home has one more bathroom than your house. Assuming an average value of $15,000 for a bathroom, your adjusted appraisal value would be $335,000.
The main benefit of the sales comparison approach is that it’s based on actual market transactions and therefore transparent and easier to verify. This approach also captures the asset’s growth over time because it relies on historical sales data.
Generally, the more comparables the appraisal identifies, the more accurate the final appraisal could be. The widespread use of the sales comparison approach means it is widely considered a reliable and credible appraisal method for lenders.
Cost approach
The sales comparison approach requires comparable properties, so the appraiser must use different methods if there are no comps to assess. This may be the case for new builds or homes that are significantly unique compared to nearby properties.
Appraisers can instead use a cost approach. This method estimates the value of a property by calculating the cost of materials and labor to rebuild or reproduce it.
For example, an appraiser might estimate that construction materials are worth $300,000 and the land the house is on is worth $150,000. Assuming no depreciation, the final appraisal would be $450,000.
The cost approach is best used when there are insufficient comparables, but the appraiser usually won’t rely on a cost approach by itself.
Income capitalization approach
The third major way a home appraisal is calculated is called the income capitalization method. This method is based on the amount of rental income that a specific property can provide.
The appraiser will estimate the net operating income (NOI) of the property and divide it by the expected rate of return.
The income approach is primarily used for investment properties rather than primary residences. The analysis is focused on the property’s rental market valuation. The main downside of this approach is that it cannot account for rental market shocks and unexpected market fluctuations.
What appraisers look at during the home inspection
Appraisers consider several key features when assessing homes, including the foundation, structural elements, features, upgrades, size, and neighborhood. The purpose of an appraisal is to provide a comprehensive assessment of a home's fair market value.
Below is what a typical home appraisal checklist looks like:
- Interior features: Square footage, no. of bedrooms/bathrooms, appliances, flooring, etc.
- Exterior features: Roof, foundation, siding, gutters, windows, doors, etc.
- Functional issues: Design, layout, and landscaping (e.g., open vs non-open kitchen)
- Health and safety issues: Structural issues, mechanical problems (e.g, HVAC, electricity, etc.)
- Permanent fixtures: Installations, upgrades, or additions
- Condition grading: Curb appeal, cleanliness, color, etc.
What hurts a home appraisal
When looking at home features, the appraiser will also note things that will take away from a property’s fair market value.
A low appraisal impacts the size of the loan you can get, so you need to deal with anything that could hurt the appraisal quickly:
- Deferred maintenance: Undone maintenance is the single largest thing that can hurt a property appraisal.
- Old roof: Roof problems and structural issues will be a major mark against the property.
- Outdated HVAC: Outdated HVAC systems can result in significantly higher heating and cooling bills, which can lower the property's value.
- Poor curb appeal: Buyers will be turned off by dirty siding, faded painting, and poorly done landscaping.
- Old kitchens: Kitchens are one of the most important selling parts of a house.
- Personalized items: Niche and highly personalized installations, like a hot tub, can harm the appraisal value.
What adds the most value to a home appraisal?
You can’t control every aspect of how home appraisal is calculated (e.g., location, neighborhood, etc.), but there are many factors you can. Preparing for a home appraisal is how you can get the maximum value out of your home when selling.
Below are some updates and additions that can boost property values the most.
- Updated kitchens: New appliances and hardware (e.g., cabinets)
- Updated bathrooms: New toilets, sinks, showers, and vanities
- New roof: Refurbished or new construction
- Energy-efficient improvements: Heat pumps, low-flow toilets, an electrified water heater, etc.
- Additional living space: ADU or duplex
- Finished basements: Flooring, insulation, and lighting
- Garage additions: Remote doors, storage solutions
- Lot usability improvements: Better access, infrastructure, or utilities
Other types of appraisals
If a property appraisal cannot be conducted in person, alternative methods are available. Most of these methods will require you to get an appraisal waiver:
- Desktop appraisals are performed by gathering pictures and analyzing comparable properties (comps) to determine a property's value.
- Drive-by appraisals assess the exterior of the property, relying on pictures and market data rather than an in-person inspection of the inside.
- Hybrid appraisals use two parties — an appraiser who analyzes market data and a second party that assesses the inside.
These methods may be used for low-risk borrowers buying properties with a substantial amount of market data. Methods requiring appraisal waivers have become more common thanks to advances in automated appraising and competitive markets.
Appraised value vs. market value vs. assessed value
The appraised value of a house should be distinguished from its market value and assessed value, as each serves a different purpose. All three valuations won’t necessarily be the same.
| Appraised Value | Market Value | Assessed Value |
|---|---|---|
| Determined by licensed appraisers Used by lenders to set loan limits | Determined by the housing market Used to buy/sell houses | Determined by the county government Used to set property taxes |
For example, the appraised value of a house might be less or more than the probable price the house will sell for (market value).
Inspection vs. appraisal
The key difference between home inspections and appraisals is their purposes. Inspections assess a property’s physical condition and whether it meets minimum habitability standards. An inspection looks for structural issues with roofs, walls, and foundations, as well as mechanical problems with plumbing, electricity, and HVAC.
Appraisals, on the other hand, are concerned with calculating a property’s fair market value. Inspections can impact appraisals because structural issues can cause the home to have a lower price. For instance, the appraiser might deduct the cost of repairs from the final appraised amount to adjust for inspection issues.
How does the appraisal affect my loan?
There are a few different ways that appraisals can influence a mortgage loan or refinance.
Loan-to-value (LTV)
The primary way an appraisal impacts your loan is the loan-to-value ratio. This is the ratio of the loan's value to the property’s appraised value.
Most lenders require an appraisal before issuing a mortgage and will only lend up to the amount the property appraises for. Lenders do this to ensure they don’t issue more than what the property is worth.
A higher LTV means the lender is assuming more risk, and many lenders will charge mortgage insurance if the LTV is higher than 80%. If there is a mismatch between the appraised value and the sales price, the lender typically will provide the lower of the two.
What if the appraisal comes in high?
If the appraisal comes in high, that’s good news for you. A high appraisal means you are buying the home for below its expected fair market value.
Since the appraisal is higher than the asking price, it won’t affect your mortgage. If you are in the seller’s seat, a high appraisal means you can get a cash-out refinance or get a better interest rate/loan term.
What happens if the appraisal comes in low?
If the appraisal is low, it could affect your mortgage. The lender will only loan you an amount up to the appraised value of the house. If the appraisal comes in below the sales price, you will have to either cover the difference when closing or negotiate a better deal with the seller.
Can you dispute a home appraisal?
If you think the appraisal is inaccurate, you can request a reconsideration of value (ROV) from the lender. You must provide evidence that the appraiser made errors in their report and miscalculated the value of your home.
The general steps for disputing are:
- Review the appraiser reports for inaccuracies, such as listing the wrong square footage or the incorrect number of rooms.
- Provide a separate analysis that includes your own, more accurate assessment of the property value.
- Submit a reconsideration request to your lender.
It typically takes between two and seven days for lenders to process ROVs.
Summary
Having an accurate appraisal can give you leverage in the buying process, as you can adjust the sales price based on the home’s fair market value. An experienced real estate agent will understand how a home appraisal is calculated and can use appraisals to negotiate a fair deal, saving you money on closing costs.
Don’t have an agent yet? Clever’s nationwide network of experienced real estate agents can help connect you with someone who helps buyers like you land their dream home, even if there are hiccups with the appraisal. Take a short quiz to meet agents in your neighborhood today!
FAQ
How do you calculate the appraised value of a home?
You can calculate the appraised value of a home by comparing it with similar recently sold properties or by assessing the cost of building the house plus depreciation.
Do appraisals usually match the asking price?
Appraisals are typically close to the agreed-upon price between the buyer and the seller, which is not always the same as the asking price of the home. Market volatility and bidding wars can create gaps between appraisal and sales prices.
What will fail a home appraisal?
A given house might not appraise for its sales prices for many reasons, including overpricing, repair issues, unpermitted work, or shifts in housing demand.
Who pays for the appraisal?
In most cases, the buyer pays for the home appraisal as lenders typically require an appraisal to issue a mortgage.
What hurts a home appraisal?
Things that can hurt a home appraisal and reduce its value include deferred maintenance, outdated features, unappealing layouts, being located in an undesirable area, and cosmetic issues, like stained walls or carpets.
Are appraisals the same as CMAs?
No, appraisals are not the same as a comparative market analysis (CMA). Although both assign a value to a home, an appraisal is a formal, legally binding process performed by a licensed professional, while a CMA is informal.
Do appraisers consider Zestimate or other home value tools?
No, appraisers don’t use websites like Zillow or home valuation tools like Zestimate. They instead provide individual in-depth assessments of the home’s features.