For a single-family home, an appraiser usually starts calculating market value by comparing 2–3 similar properties (called "comps"). They’ll also visually inspect the home for any damages that might hurt its value.
Lenders require home appraisals to make sure the house is worth what it’s being sold for. If the appraisal comes back lower than the purchase price, your lender may ask you to pay the difference in cash, or you'd have to negotiate a lower price.
How do appraisers estimate home value?
Appraisers estimate a home’s value in three main ways:
- Comparing it with other properties (market data analysis)
- Calculating how much it would cost to rebuild the property from scratch (cost to reproduce)
- Calculating how much income it produces (income capitalization)
📊 Market data analysis
A market data analysis (or sales comparison) appraises a home by comparing it with recently sold properties within the same neighborhood. This is widely considered the most accurate for residential properties.
Recently sold properties are called "comps" or "comparables," and they usually have the same or similar:
- Style of house
- Square footage
- Number of bedrooms and bathrooms
- Amenities (e.g., garages, carports, pools)
Appraisers will average the sales prices of three or four comps to arrive at a fair market value.
If an appraiser can’t find similar properties, they’ll make adjustments based on how much the market is paying for certain features, such as size, date of sale, location, condition, and amenities.
🛠 Cost to reproduce
A reproduction approach is based on the potential cost to rebuild the house in question. It’s often used for newer homes — though an appraiser will rarely depend on this method alone, preferring instead to use it as a supplement to other approaches.
For instance, an appraiser may decide that:
- Replacing a home would cost $185,000 (both materials and labor).
- The land on which the home sits is worth $100,000.
If the home hasn’t depreciated, then the appraisal would be the sum of these: $285,000.
💰 Income capitalization
The income capitalization approach appraises commercial property based on the income it generates for investors at the moment.
This approach is used on commercial and investment properties. An appraiser of any owner-occupied homes will never use this approach to calculate market value.
Other types of home appraisals
Most appraisals are on-site, examining a property's interior and exterior. But if an on-site appraisal isn’t possible, the three most common alternatives are:
🖥 Desktop appraisals eliminate the on-site inspection. Instead, an appraiser will gather pictures, MLS data, and comps to decide how much the property is worth. Because these are risky for lenders, you need an appraisal waiver first.
🚗 Drive-by appraisals eliminate the interior inspection. An appraiser will still look at the exterior, but they’ll rely more heavily on market data (comparing the property with others), then a visual inspection of the inside.
🔍 Hybrid appraisals, or "bifurcated appraisals," split the appraisal between two parties. The first party is the licensed appraiser. They’ll compare it with similar properties to decide how much they think it's worth. The appraiser will then hire a third-party to visually inspect the property.
The main difference between inspections and appraisals is that inspectors are concerned with a home’s physical condition, whereas appraisers are concerned with calculating its market value.
Home inspectors look for structural problems, like roofing issues or leaks. Appraisers may also look at a home’s condition, but they rarely inspect it as thoroughly as professional inspectors. Likewise, inspectors never look at the property’s market data.
How does the appraisal affect my loan?
Loan-to-value ratio (LTV)
Once a home is appraised, lenders can calculate your loan-to-value ratio (LTV). Basically this ratio compares your desired mortgage (i.e., the amount you hope to borrow) with the home’s appraised value. The resulting number helps lenders assess the risk in lending you money. The formula for LTV is:
LTV = mortgage amount / appraised property value
For instance, if a home is appraised at $300,000, and you want a $250,000 mortgage to buy it, then your LTV is 83.3%.
👌 What’s a good LTV for a conventional mortgage? Lenders prefer LTVs below 80%, meaning you pay at least 20% of the home’s purchase price at closing. You can still get a mortgage for higher LTVs, but you may have to accept a higher interest rate.
Lenders use the appraisal to determine how much money they’ll lend to buyers. Usually, the appraised value matches the agreed-on sale price. When it doesn’t, lenders will use the appraised value as the maximum amount they lend to a home buyer.
What happens if the appraisal comes in high?
Good news! If you're buying a home and the appraisal came in higher than the sale price, it won’t affect your mortgage. In fact, you're in a good position, having bought a home below its market value.
If you’re refinancing your mortgage, a high appraisal could get you a better interest rate. Alternatively, you could cash out more of your equity at closing.
What happens if the appraisal comes in low?
A lender will usually only let you borrow up to the appraised value. So if the appraised value is lower than the purchase price, you’ll have to pay the difference in cash at closing, or negotiate a lower price with the seller.
🚨 Can you dispute a home appraisal? If you disagree with an appraisal, you can request a reconsideration of value (ROV) from your lender. You'll need to provide evidence that the home’s value is higher than the appraiser’s number, even point out inaccuracies in the appraiser’s report.
- A home appraisal is a professional opinion on what a home is worth.
- A market data analysis, also called a comparative market analysis, is widely considered the most accurate appraisal method for residential properties.