What is an Appraisal?

An appraisal is a written estimate of a property’s market value completed by an appraiser. The value is based upon a market analysis of recent sales prices for similar properties in the area, and the property’s physical condition. The appraisal is performed by an appraiser, an objective third party whose job is to give their
professional opinion of the market value of a home. An appraisal is the appraiser’s opinion of the property’s value based on their knowledge and evaluation of the property. This opinion or estimate is developed using the three standard approaches to property valuation:

The Cost Approach estimates what it would cost to replace or reproduce the improvements as of the date of the appraisal, with deductions for issues like physical deterioration. This is added to the land value to determine that value of the property.

The Comparison Approach looks at properties of similar size, quality and location that have recently sold in order to derive a comparative value. Variations between the properties are factored into the valuation by adding or subtracting amounts to adjust for things like more bathrooms, a smaller lot, etc.

The Income Approach is generally used for commercial properties, and is not typically relevant for residential property valuations. The income approach estimates the value of the property based on upon the net income the property produces.

Why is an Appraisal Required?

Lenders use the appraisal to determine the appropriate loan amount. Because home values can vary considerably, even in the same neighborhood, it’s important for the lender to have an objective opinion of the value of a home before making a loan that will be secured by the property. A lender will not lend more than the value of the home, and the appraised value is used to determine common loan ratios that factor into the loan approval process, such as loan to value (LTV).

Who Performs the Appraisal?

An independent appraiser hired by the lender performs the appraisal of a property. Appraisers are trained to value properties, and they are licensed by each states through the Division of Commerce. An appraiser must meet specific criteria in order to be licensed. The appraiser does not handle valuables, so they do not need to
be bonded. However, most appraisers do carry liability insurance to cover accidental damage to the property that may occur during the course of the appraisal.

Appraiser Jargon

Have you heard an appraiser use any of these terms? Did you just hear one of our appraisers use it and you came here to figure out what it meant? We don’t mean to speak a foreign language, but any profession has its jargon. What res ipsa loquitur is to a lawyer and triple witching is to day traders, external obsolescence is to appraisers. Here are some examples of common appraiser jargon and their meanings:


When comparable properties have been identified, the appraiser adjusts the value of the subject property according to differences in living area, acreage, frontage, amenities and the like.  This is where the professional expertise of an appraiser is most valuable.


 Personal property that may be on the subject property but which does not figure into the opinion of value in the appraisal report.

Comparable or “comp”

Properties like the subject property nearby which have sold recently, used as a basis to determine the fair market value of the subject property.  The Uniform Standards of Professional Appraisal Practice (USPAP) establish clear guidelines for comparable selection.


An appraisal that is limited to examination of comparable sales and a determination that the property is actually there and has no obvious defects or damage visible from the outside.  Fannie Mae’s form for this type of appraisal is its 2055, so you may hear a drive-by referred to as a “2055.”

Fair market value

The appraiser’s opinion of value as written in his or her appraisal report should reflect the fair market value of the property — what a willing buyer would pay a willing seller in an arm’s-length transaction.


“Gross Living Area,” the sum of all above grade floor space, including stairways and closet space.  GLA is often determined using exterior wall measurements.

Latent defects

A defect on the property that is not readily apparent but which impact the fair market value.  Structural damage or termite infestation might be examples.


A Multiple Listing Service is a proprietary listing of all properties on the market in a given area and their listing prices, as well as a record of all recent closed sales and their sales prices.  Created by and used primary by real estate agents, many appraisers pay for access to these databases to aid in comparable selection and adjustment research


The value of assets diminishes as their capabilities degrade or more desirable alternatives are developed.  Functional obsolescence is the presence or absence of a feature which renders the property undesirable.  Obsolescence can also occur because the surrounding area changes, making a feature of the property less desirable


Short for the property being appraised — the “subject property.”

Useful life

The time during which a property can provide benefits to its owner.


Short for Uniform Residential Appraisal Report, Fannie Mae form 1004, it is the form most lenders require if they need a full appraisal (that is, with walk-through inspection).


Short for Uniform Standards of Professional Appraisal Practice, USPAP promotes standards and professionalism in appraisal practice, and is often enacted into law in a state.  It is promulgated by the Appraisal Foundation, a non-governmental entity chartered by Congress to, among other things, maintain appraisal standards.


An inspection that includes a visit to each part of the interior of the house used in estimating value.