Family sitting in new houseFamily sitting in new house


By: SunnyHill Financial

Whether you are looking to purchase a home or refinance an existing one, the current appraised value of the property is as important of a factor as, if not more than, other loan characteristics such as your FICO score or debt-to-income ratio. The majority of loans originated in today’s mortgage market require a full appraisal, meaning an interior inspection of the property is required for loan approval. For the most part, gone are the days when lenders would approve loans utilizing strictly an automated value model (AVM) for the property valuation.

The appraised value is the highlight of an extremely complex document completed by a licensed appraiser located in the vicinity of the property. While it’s nearly impossible to address every question or possible outcome, the objective for my post today is to provide you with a basic overview of how an appraisal is performed for a mortgage loan and seeks to address common misunderstandings.

Purpose of the Appraisal

The appraisal will determine the most likely market value of the property. The appraiser’s opinion of value may or may not match the agreed purchase price when the property is under contract for a home purchase. The purchase price may be much more, or less than, the market value for a variety of reasons. The appraiser will consider the purchase price, along with other available information, to determine the most probable market value.


The appraiser will inspect either the exterior of the property or both the interior and exterior of the property being appraised, depending on the type of appraisal required for loan approval. The appraiser will then find appropriate comparable sales based on the inspection and research performed. Typically, the appraiser only needs to spend a short time inside the property to verify its overall condition and features. The majority of the time spent on the appraisal goes into researching the property and the surrounding area. If sales of houses that are identical to the subject are not available, the appraiser will use the most similar sales available and adjust for the differences.

The forces that influence property values are constantly changing, but an appraiser can only use the information that was available as of a certain date, called the appraisal’s effective date. The effective date is typically the date the appraiser inspects the premises. There will be other sales that close after the appraisal is completed, but the appraiser can only base his/her opinion of value on what was known when the report was completed.

Property Characteristics

Contrary to popular belief, the room count and gross living area of a house can be debatable and subject to a certain degree of judgment. The gross living area reported by one appraiser may be different from another appraiser’s report, or from what is stated in public records. The appraiser physically measures the property, and as with any physical measurement there will be slight variations between measurements. Differences of less than 10% will likely not have an effect on the opinion of value because the property is not given value solely as a function of its gross living area. A professional appraiser’s room count will not include closets, bathrooms, foyers, laundry rooms or nooks in the total room count. In addition, one appraiser might include a particular area in the total room count where another would not. This is a matter of judgment, and usually does not affect the opinion of value.

The appraiser does not include personal property such as cars or televisions in the appraisal report. Anything that isn’t permanently attached to the property is not included in the opinion of value. Appliances that are not built into the property will either be noted on the report as personal property, or not mentioned at all since they are not part of the appraisal.

The appraiser will describe any area that is below the dirt line as “below grade.” The description of the area as below or above grade will likely not affect the opinion of value since the appraiser will choose comparables with similar above and below grade areas, or make appropriate adjustments when such comparables cannot be found.

If the appraiser does not perform an interior inspection, characteristics of the property such as living area and room count will be taken from an independent data source such as public records.

Choosing Comparable Sales

At any given time, there will be houses near the subject property that sold for more than the appraiser’s opinion of value. There will also be houses listed for sale at higher prices than the appraiser’s opinion of value. There will also be houses that sold for less and those that are listed for less. The appraiser’s job is to choose among these sales and find the sales that best compare to the subject property. If foreclosures or distressed sales have an impact on the market, the appraiser will use those types of sales as comparables.

Adjusting for Differences

The appraiser will often state that the condition of the subject property is “average” even in the case of well-finished houses. The use of the term “average” simply means that the subject property is average for the neighborhood or its market segment. It does not mean the property is average in comparison to all properties. The appraiser will account for improvements to the property and will note as many of the subject property’s features as is reasonably practical.

The appraiser must have a market basis for giving value to upgrades or improvements to the property. The appraiser accounts for the additional features of the subject property by choosing comparables with similar overall appeal and upgrades. Since a recent sale of an identical house with identical features is rarely available, the appraiser must find the most similar comparables available and use his/her judgment and experience to determine the correct adjustments.

Building Costs

Building costs may or may not match market value. Sometimes a house may cost much more to build than it will be worth on the open market. It may also cost much less. Since building costs are not always consistent with market value, the appraiser will rely primarily on the value indicated by sales of houses similar to the subject. In a similar vein, remodeling and upgrades to a house usually cost more than the market will pay for them. In other words, the cost of the remodeling does not translate dollar for dollar into market value. As stated previously, the appraiser must account for features and upgrades by choosing comparables with similar features and upgrades.

The appraiser’s opinion of value can be broken down into a dollar value for each square foot of living area. This number isn’t of much use because houses are not purchased solely based on the amount of living area they contain alone. The living area interacts with the other characteristics of the property, and the appraiser isolates the living area characteristic by choosing the most similar comparables available.

The appraiser will isolate the value of additional land the subject property may have by finding the most similar comparables available. The appraiser will adjust for lot size differences based on what a potential buyer would pay for the additional yard size, given the other features of the house. This will not be the same as “raw land” values since houses are not purchased based on the size of the lot alone.

Completing the Report

The appraisal may contain data collection errors, such as the census tract or assessment year. These can be corrected, but they will not affect the appraiser’s opinion of value. To avoid these types of errors, appraisers will sometimes request a copy of an old appraisal so they can check their own report for minor errors.

The appraiser may use MLS photos of the comparables either because the property cannot be seen from the street or because the MLS photo is, in the appraiser's opinion, a more accurate representation of the comparable sale than a current photo would be since it shows the condition of the property at the time it was sold.

External Factors

There are many things that occur outside the completion of the appraisal that may cause one to question the appraised value. Those external factors are addressed in the section below.

Tax Assessment Value

A common misconception is that the market value of a property and the tax assessed value should be similar or the same. That should be the case, in theory, but tax assessed values are nothing more than a yard stick for a municipality to collect an appropriate amount of taxes to sufficiently cover the state and local budget. The tax assessed value is used to determine the basis for the owner’s property taxes, and there are many factors which can cause an increase in tax assessment but not market value. In addition to serving an entirely different purpose and being driven by factors that don’t influence a mortgage loan appraisal, there is usually a time lag between when the assessment was done and the appraisal was completed. In summary, there is almost always a disparity between the tax assessed and appraiser’s market value, whether it’s due to time lag or that the two values were never even close in the first place.

The Location of the Appraiser’s Office

The appraiser must cover a large area in order to obtain sufficient orders to maintain their appraisal business. The distance the appraiser traveled to complete the assignment may have no impact on the accuracy of the report. An appraiser living a block away from the subject property doesn’t necessarily make him a good appraiser. And just because an appraiser may live far from a property doesn’t necessarily make him a bad appraiser. A superior appraisal can be completed by an appraiser from outside the immediate county as an unbiased opinion is often the best opinion.

Real Estate Websites

Many websites, such as Zillow or Trulia, offer information about real estate including property value estimates. These estimates may be used to give a general idea of a property’s value range, but can’t be relied on for more than that. A statistical estimate is no substitute for the judgment or evaluation of a professional appraiser.

Other Appraisals

Appraisals are done for a wide variety of purposes, such as tax assessment or insurance. Appraisals done for any purpose other than a mortgage loan will likely have a different value outcome because these other types of appraisals approach the property valuation completely differently.

Another appraisal done for a mortgage loan may have a different opinion of value. This could be due to a time lag between the two reports, since market conditions are constantly changing. Even if the two appraisals were done at the same time, the values might be different. The preparation of an appraisal requires the knowledge, experience and judgment of the appraiser. Since an appraisal represents an opinion, and a certain degree of professional judgment is necessary, a difference of opinion between appraisers is expected. As long as the difference is reasonable, the reader should not be alarmed.


If you have made it this far, congratulations! I hope you now have a better understanding of the appraisal basics for a mortgage loan. You can contact us at 844-648-5512 or email us at