Introduction
For most buyers, the appraisal is something that happens to you rather than something you arrange. Your lender orders it, pays for it (and charges it back to you in closing costs), and uses the result to decide how much to lend. You receive the report, review the number, and hope it comes in at or above your purchase price.
But there are situations where understanding appraisals more deeply, or even hiring your own independent appraiser, serves your interests as a buyer. This article explains what appraisers do, how they reach their conclusions, what affects appraisal values, and when a buyer might choose to engage one independently.
What an Appraisal Is (and Why Lenders Require It)
An appraisal is a professional opinion of a property's market value, conducted by a licensed or certified appraiser. Lenders require an appraisal before approving a mortgage because they're lending against the property as collateral. If you default on your loan, the lender needs to know that the home they'd have to sell is worth at least as much as what they lent you.
The appraisal protects the lender from over-lending. If a home appraises at $400,000 and you're borrowing $380,000, the lender is comfortable because the collateral supports the loan. If you're trying to borrow $380,000 on a home that appraises at $360,000, that's a problem, the appraisal gap, which we'll address later.
The appraiser is hired by and reports to the lender, not to the buyer. Even though you pay for the appraisal (typically $400 to $700 or more for complex or high-value properties), you are entitled to receive a copy but the appraiser's primary client is the lender.
What the Appraiser Does
The Property Inspection
The appraiser visits the property to assess its physical characteristics. This is distinct from a home inspection: the appraiser is not evaluating the condition in detail but is noting the property's size, features, and overall condition as they relate to value. They'll measure the home (or use existing measurements), photograph the interior and exterior, and note the number of bedrooms, bathrooms, garage spaces, and other value-affecting features.
The appraiser is looking for obvious condition issues that significantly affect value: a damaged roof, major deferred maintenance, and safety hazards that would prevent financing (particularly for FHA and VA loans, which have minimum property requirements). They're not conducting a detailed inspection of systems the way a home inspector would.
The Comparable Sales Analysis
The core of an appraisal is the sales comparison approach: identifying recent sales of comparable properties (called "comps") in the same area and adjusting their sale prices upward or downward based on differences between those properties and the subject property.
For example, if a nearby comparable home sold for $400,000 but has one fewer bedroom than the home you're buying, the appraiser might add $15,000 to that comp's sale price to account for the difference. If the comp has a larger lot, the appraiser might subtract an amount. The final adjusted sale prices of the comps help establish the likely market value of the subject property.
Appraising is part science and part professional judgment. The selection of comps, the adjustment amounts, and the ultimate reconciliation of value involve appraiser discretion. This is why two appraisers looking at the same property might reach slightly different conclusions.
Other Approaches to Value
For certain property types, appraisers may also use the income approach (for income-producing properties, based on rental income potential) or the cost approach (estimating what it would cost to rebuild the property, less depreciation). For most residential single-family purchases, the sales comparison approach is primary.
What Affects Appraised Value
Understanding the factors appraisers consider helps you evaluate whether a home is likely to appraise at a given price.
Location
Location is the most significant driver of value. School district, neighborhood quality, proximity to amenities and employment, lot position (corner lot, cul-de-sac, backing a busy road), and similar factors all affect value. Appraisers use comparables in the same neighborhood whenever possible to control for location variables.
Size and Configuration
Square footage, number of bedrooms and bathrooms, garage capacity, and lot size all affect value. Appraisers make adjustments between comps and the subject property for size differences, though the adjustment amounts vary by market and appraiser.
Condition and Age
A home in excellent condition appraises higher than a comparable home in poor condition. Updated kitchens, bathrooms, and systems contribute to value. Deferred maintenance, outdated systems, and significant wear reduce it. The age of major systems (roof, HVAC, water heater) factors into the appraiser's assessment of condition.
Improvements and Features
Not all improvements return their full cost in appraised value. Kitchen and bathroom renovations tend to have the highest value contribution; landscaping and luxury upgrades typically recover a smaller fraction of their cost. Location also affects this: a pool adds value in warm climates and may add little or even reduce value in cold ones.
Market Conditions
Appraisers reflect current market conditions in their analysis. In a rising market, appraisers ideally use the most recent comps available. In a declining market, they note downward trends. Their job is to reflect what a willing buyer would pay a willing seller in the current market, not what buyers paid a year ago or what they might pay in the future.
What Happens When the Appraisal Comes In Low
A low appraisal, one that comes in below the purchase price, creates a problem. Your lender will only lend based on the appraised value (or the purchase price, whichever is lower). If you're borrowing 95% of a $400,000 purchase price but the home appraises at $380,000, your lender will only loan 95% of $380,000, leaving a $19,000 gap between what you were expecting to borrow and what the lender will provide.
Your options when an appraisal comes in low include: renegotiating the purchase price downward with the seller, making up the gap in cash (paying more than the appraised value out of pocket), challenging the appraisal with additional comparable sales data (called a reconsideration of value), or walking away if you have an appraisal contingency in your contract.
This is covered in more depth in the Category 8 article on appraisals, but it's worth understanding as context for why the appraisal matters so much in a transaction.
When Buyers Hire Their Own Appraiser
The lender's appraisal protects the lender. There are situations where buyers choose to hire their own independent appraiser to protect themselves.
Evaluating Fair Value Before Making an Offer
In a hot market where homes are selling above list price and you're considering offering significantly over asking, a pre-offer appraisal can help you understand the true market value and whether your offer is reasonable. This is relatively uncommon because of cost and timing, but it provides data that's otherwise hard to access.
When You're Waiving the Appraisal Contingency
In very competitive markets, some buyers waive the appraisal contingency to make their offer more attractive. If you're doing this, hiring your own appraiser (or having your agent pull detailed comps) before you submit the offer helps you understand what you're committing to.
Challenging a Low Appraisal
If the lender's appraisal comes in low and you believe it's inaccurate, hiring your own appraiser to conduct an independent assessment gives you data to support a reconsideration of the value request. Not all lenders will accept an independent appraisal as grounds for revision, but having professional documentation of your position strengthens your case.
Removing PMI
Once you own a home and want to remove PMI based on appreciation, your lender will require an appraisal. In this case, you're not buying; you're having an existing property appraised to establish current market value. You may hire an appraiser independently or request one through your lender.
How to Find a Licensed Appraiser
Appraisers are licensed by the state and can be verified through your state's appraiser licensing board. For a lender-ordered appraisal, you don't choose the appraiser; the lender selects one through an appraisal management company (AMC) to maintain independence. For an independent appraisal you're ordering yourself, you can find licensed appraisers through:
- The Appraisal Institute's appraiser directory (ai.appraisalinstitute.org)
- Your state's appraiser licensing board
- Referrals from your agent, lender, or attorney
Look for appraisers with experience in your specific property type and geographic area. Local market knowledge is critical to accurate comparable selection.
Final Thoughts
For most homebuyers, the appraisal is a lender requirement that happens in the background. Understanding how appraisers work, what they look at, and what their conclusions mean helps you evaluate your transaction more clearly and respond appropriately when the appraisal comes in at, above, or below the purchase price.
If you're ever in a situation where an independent appraisal would be valuable, challenging a low number, evaluating fair value before a competitive offer, or removing PMI, knowing what appraisers do and how to find one puts you in a better position to use that tool effectively.
Sources & Further Reading
For authoritative information on the topics covered in this article, consult these resources:
