Appraisals for Real Estate Investors: A Comprehensive Guide

In real estate investing, understanding appraisals is essential.

Below, we’ll walk through what an appraisal is, when you’ll need one, and how it impacts your transactions.

We’ll also cover the types of appraisals, the methods appraisers use to determine value, and what happens when the appraisal doesn’t match your expectations.

Whether you’re buying, selling, or refinancing, this guide will give you the information you need to handle appraisals confidently.

What is an Appraisal?

An appraisal is an informed opinion of value.

It’s conducted by a licensed appraiser who evaluates the property’s characteristics, condition, and comparable sales to determine its market value.

Appraisals are typically required by lenders to ensure that the loan amount is justified by the property’s worth.

While it’s primarily used for financing purposes, understanding the appraisal process helps you make informed decisions when buying, selling, or refinancing real estate.

Appraisal, CMA and BPO

There are several methods used to estimate the value of a property, each serving different purposes.

Below, we’ll explore the differences between an appraisal, a Comparative Market Analysis (CMA), and a Broker’s Price Opinion (BPO), including when each one is typically used.

Appraisal (Performed by a Licensed Appraiser) – An appraisal is conducted by a licensed appraiser who follows specific guidelines and regulations. Appraisals are typically required by lenders when financing a property to ensure the loan amount aligns with the property’s market value. It is a formal, detailed evaluation based on comparable sales, property condition, and market data. Appraisals are used for financing, refinancing, and certain tax or legal purposes, but not usually for listing or cash offers.
Comparative Market Analysis (CMA) – A CMA is performed by a real estate agent by comparing recent sales of similar properties to estimate a home’s market value. It is commonly used for setting listing prices or evaluating what to offer during a purchase. While it relies on the agent’s market knowledge, it doesn’t have the same level of detail as an appraisal. CMAs are used for pricing properties or quick investment decisions but are not appropriate when a lender or formal valuation is required.
Broker Price Opinion (BPO) – A BPO is similar to a CMA conducted by a licensed real estate agent as a formal report and their official opinion of value. BPOs are often used by lenders for bank-owned properties (REOs), short sales, or for annual valuations in self-directed retirement accounts. They are typically less formal and less expensive than appraisals but offer more detail than a CMA. BPOs are used for lender evaluations of distressed properties or ongoing retirement account valuations but are not suitable for situations requiring a formal appraisal.

Types of Appraisals (Desktop, Drive-By, Full Appraisal)

There are several types of appraisals used in real estate, each with different levels of detail and cost. Which one is used often depends on the lender’s requirements and the risk associated with the transaction. Below are the three common types of appraisals and when each is typically used.

Desktop Appraisal – A desktop appraisal involves no physical inspection of the property. The appraiser relies on public data, online information, and comparable sales to determine the property’s value. This type of appraisal is often used for refinancing or low-risk transactions where a physical visit isn’t necessary.
Drive-By Appraisal – In a drive-by appraisal, the appraiser visits the property but only inspects the exterior. They assess the condition and location of the property while relying on public records and external observations to estimate the value. Drive-by appraisals are typically used when a full interior inspection isn’t required or feasible.
Full Appraisal – A full appraisal is the most thorough option, where the appraiser conducts a physical inspection of both the interior and exterior of the property. The appraiser considers property condition, updates, and any unique features during the inspection. This type of appraisal is required for most purchase transactions and higher-risk loans.

We will be focusing on full appraisals for the rest of the chapter.

When to Get an Appraisal

There are specific situations in real estate when you’ll need to get an appraisal.

The timing and purpose of the appraisal will depend on whether you’re buying, refinancing, selling a property, or removing private mortgage insurance (PMI).

Here’s a breakdown of when to get an appraisal and the considerations for each scenario.

When Buying a Property (Usually Required by Lender) – The appraisal is primarily for the lender, not the buyer. It’s typically done after you have an accepted contract, but you should ideally wait until after passing inspections before committing to the appraisal. This is because inspection negotiations are often the point where deals can fall apart. Though the lender orders the appraisal, you may need to pay for it directly outside of closing. Be sure to stay mindful of your contract dates and deadlines, coordinating with your lender to avoid delays. Rushing an appraisal can lead to additional fees, especially in fast-closing situations or during periods with heavy appraisal demand.
When Refinancing a Property (Usually Required by Lender) – If you’re refinancing, an appraisal is usually required to determine the property’s current value. This helps the lender assess whether the loan-to-value ratio justifies the refinance, ensuring they’re not over-lending on the property.
When Setting a Sales Price to Sell a Property – You might choose to get an appraisal to determine the value of your property, particularly if you’re selling without a real estate agent. However, it’s not commonly done unless the property is highly unusual. Keep in mind, if the buyer is obtaining a loan, their lender will require a separate appraisal regardless of your efforts. For unusual properties, appraised values can vary significantly, as the valuation is just an opinion.
When Removing Private Mortgage Insurance (PMI) – If you’re looking to have PMI removed from your loan, an appraisal is often required. Lenders need to confirm that your property has appreciated enough for your equity to exceed 20% of the home’s value. This ensures that the loan-to-value ratio is low enough to eliminate the need for PMI, saving you monthly insurance premiums.

Appraisal Contingencies in Real Estate Contracts

An appraisal contingency is a key part of many real estate contracts. It protects the buyer if the property doesn’t appraise for the agreed-upon purchase price.

Here’s what you need to know about how appraisal contingencies work and what your options are if the appraisal comes in low.

What Happens if the Property Doesn’t Appraise for the Purchase Price? – If the appraisal comes in lower than the contract price, several outcomes are possible. Lenders usually base their loan amounts on the appraised value, so a lower appraisal could mean the lender will reduce the loan amount, requiring the buyer to cover the gap between the loan and purchase price. This impacts the Loan-to-Value (LTV) ratio and could also affect the buyer’s ability to qualify for financing.
Renegotiation Strategies or Walking Away – If the appraisal is lower than the purchase price, the buyer and seller have options. The buyer can try to renegotiate the price to match the appraised value, ask the seller to lower the price, or offer to pay the difference in cash. The seller can agree to lower the price or reject the buyer’s request. If no agreement is reached, the buyer may have the option to walk away from the deal, depending on the terms of the contract and whether the contingency is in place.
Importance of Understanding the Appraisal Contingency Clause – The appraisal contingency protects the buyer by allowing them to back out or renegotiate if the property doesn’t appraise. If the buyer waives the appraisal contingency, they are committing to buying the property at the agreed price, regardless of the appraisal outcome. Missing the deadline to object to the appraisal can also limit the buyer’s ability to negotiate or terminate the contract, making it crucial to understand and track the contract’s appraisal-related dates.

Appraiser Requirements

Becoming an appraiser involves meeting specific education, experience, and testing standards. Here are the main requirements to become licensed or certified as an appraiser.

To Be Licensed – Appraisers need to complete 150 hours of education and gain 1,000 hours of experience over at least six months. They must pass an appraiser exam and a background check.
To Be Certified – To become certified, appraisers need 200 hours of education and 1,500 hours of experience over 12 months. A college degree is also required for certification.

There are different types of licenses and certifications based on the level of expertise and education.

Licensed Residential Appraiser – No college degree required.
Certified Residential Appraiser – Requires a bachelor’s degree or higher.
Certified General Appraiser – Also requires a bachelor’s degree or higher and more experience for complex property types.

Appraisers must also complete continuing education to maintain their credentials.

Continuing Education – Appraisers are required to complete 14 hours of continuing education annually, including a 7-hour National USPAP Update Course every two years.

State-specific requirements and supervision for trainees are also important factors.

State-Specific Requirements – Some states have additional education or experience requirements beyond national standards.
Supervision – Trainee appraisers must work under a certified appraiser to gain necessary experience.

Professional associations and specializations can help appraisers advance their careers.

Professional Associations – Membership in organizations like the Appraisal Institute can offer additional credentials.
Specializations – Appraisers may need further training for specific property types, like commercial real estate or sustainable properties.

Three Approaches to Value

Appraisers use three main approaches to determine a property’s value. Each approach is tailored to different property types and situations.

Comparable Sales – This approach, also known as the Sales Comparison Approach, involves comparing the subject property to recent sales of similar properties in the area. It’s most commonly used for residential properties, where the appraiser adjusts the value based on differences in size, condition, and features between the subject property and the comparables.
Income – The Income Approach is used primarily for income-generating properties, such as rental units or commercial buildings. This method estimates value based on the property’s potential income, considering factors like rent, operating costs, and expected returns.
Cost – The Cost Approach is typically used for newer properties or unique buildings. It estimates the value by calculating the cost to replace or reproduce the property, minus any depreciation. This approach is less commonly used for residential homes unless no comparable sales are available.

What Approach is Used in a Typical Appraisal?

In a typical property appraisal, the appraiser selects one or more of the three main approaches to value, depending on the property type and purpose of the appraisal.

Sales Comparison Approach – This is the most commonly used approach, especially for single-family homes (SFH). The appraiser compares the subject property to similar properties that have recently sold. The Sales Comparison Approach is typically the primary method for residential properties.
Income Approach – This method is primarily used for income-generating properties, such as multifamily buildings or commercial real estate. The appraiser estimates the property’s value based on its income potential. For multifamily properties, the Income Approach is often the primary method, with the Sales Comparison Approach used as supporting evidence.
Cost Approach – The Cost Approach estimates the value based on the cost to replace or reproduce the property, minus depreciation. It is more commonly used for newer or unique properties, and is often used in rural areas where comparable sales are scarce. For SFH, this method may be included, though Fannie Mae doesn’t always require it.

Usage Based on Property Type:

Single-Family Homes (SFH) – The Sales Comparison Approach is typically the primary method. The Cost Approach may be used but is often not required. The Income Approach is rarely used unless the property is an investment.
Multifamily Properties – The Income Approach is the primary method, as these properties generate rental income. The Sales Comparison Approach is often included to support the valuation.
Commercial Properties – All three approaches are generally used, with an emphasis on the Income Approach for income-producing properties.

Factors Influencing Approach Selection:

Property characteristics – Unique or specialized properties may require modified approaches.
Available market data – A lack of comparable sales may lead the appraiser to rely more on the Cost Approach.
Lender requirements – Lenders may specify which approaches are required based on the loan type.
State regulations – Different states may have specific guidelines on which approaches should be used.
Purpose of appraisal – Whether the appraisal is for a mortgage, tax assessment, or litigation can influence which method is prioritized.

Reconciliation

After considering the results from the various approaches, the appraiser reconciles the findings to determine the final value. They weigh the reliability and applicability of each method to provide the most accurate estimate.

Special Considerations

Unique properties – These may require customized approaches, as they don’t fit neatly into traditional categories.
Rural properties – The Cost Approach may be more heavily relied upon if comparable sales are limited.
Highly specialized properties – For properties like hotels or large commercial buildings, additional or modified methods may be used.

Understanding Market Conditions Addendum

The Market Conditions Addendum is a critical part of the appraisal process, providing insight into how recent trends in the local real estate market can influence a property’s value.

How Current Market Conditions Affect the Appraisal – The Market Conditions Addendum reflects the trends in property values, whether they are increasing, decreasing, or stable. Appraisers use this addendum to document how the market’s direction impacts the appraised value. In volatile markets, where property values can shift quickly, these changes can significantly affect the final appraisal.
Time Adjustments Based on Rapidly Changing Market Conditions – When the market is moving fast, appraisers may need to adjust for the timing of comparable property sales. If comparable sales are older, adjustments are made to reflect changes in the market since those properties sold. For example, if the market has appreciated or depreciated significantly, the appraiser will document and explain these adjustments in the Market Conditions Addendum, ensuring the final value reflects current conditions accurately.

Focus on Comparable Sales for Single-Family Homes

When appraising single-family homes (SFH), the primary emphasis is on the Comparable Sales Approach. This method uses recent sales of similar properties to determine the value of the home.

We’ll cover important aspects like:

Comparable Sale Selection – How appraisers choose which properties to compare.
Types of Adjustments – What changes are made to account for differences between the properties.
Rough Rules of Thumb – General guidelines for adjustments based on market conditions and property features.

Normal Selection Criteria for Single Family Homes Comps

When selecting comparable sales (comps) for appraising single-family homes (SFH), appraisers follow certain guidelines to ensure an accurate valuation. Here are the typical criteria they use:

Same Style – Comps should be of the same general style as the subject property, whether it’s a ranch, two-story, or multi-level home.
Similar Size – Appraisers look for properties that are within +/- 20% of the subject property’s square footage, though there are exceptions.
Similar Age – The comps should generally be within +/- 20 years of the subject property’s age. Sometimes, appraisers use the “effective age” of the property based on its condition and updates rather than its actual age.
Style and Layout Judgment – Appraisers use reasonable judgment, comparing homes with similar style or layout. For example, open-concept homes should be compared with other open-concept homes, not those with traditional walls and doors.
Neighborhood Considerations – If necessary, it’s better to go outside the immediate neighborhood for a more similar home rather than adjusting heavily for age differences within the same neighborhood.
Sales Timing – Ideally, comps should come from sales within the last six months. In a declining market, appraisers may look for more recent sales within the past three months. Sales as old as a year may be acceptable in less active markets.
Geographic Proximity – Comps are usually drawn from within a 1-mile radius of the subject property. This radius may be extended for unusual properties that don’t have enough nearby comps.
Minimum of Three Comps – At least three comparable sales are typically required, but appraisers may use more if the available comps are not ideal matches.

What is an Adjustment?

Adjustments in appraisals are made to account for differences between the subject property and the comparable sales (comps).

These adjustments help ensure a fair comparison between the properties by adding or subtracting value based on specific factors.

Adding or Subtracting Value – Adjustments are made when the comparable property differs from the subject property in terms of size, condition, quality, or features. If the comparable sale is better than the subject property, the appraiser subtracts value from the comp’s sale price. If the comp is worse, the appraiser adds value to it.
Local Market Data – Appraisers rely on local market data to determine adjustments. While general rules of thumb exist, adjustments should be based on data specific to the area and current market conditions. What applies in one market may not apply in another.
“Best Adjustment is No Adjustment” – Ideally, the appraiser will find comparables that require little to no adjustment, as this provides the most accurate reflection of value.
Paired Sales Analysis – A paired sale analysis is a method used to determine how much specific features add or subtract from a property’s value. The appraiser compares two nearly identical properties, where only one feature differs, to isolate that feature’s impact on value. For example, if two homes are nearly the same except that one has a 2-car garage and the other has a 3-car garage, the difference in their sale prices can help appraisers estimate the value of that extra garage space. Experienced appraisers build a database of these paired sales to make more accurate adjustments.

By carefully adjusting for differences, appraisers can more precisely estimate the value of the subject property based on the comparable sales available.

Example of Adjustments

Adjustments in appraisals help account for differences between the subject property and comparable sales. Here are key rules and common types of adjustments that appraisers use.

Key Rules in Residential Appraisals – Appraisers follow strict guidelines when making adjustments. No single line item adjustment should exceed 10% of the property’s value, total net adjustments should not exceed 15%, and total gross adjustments should not exceed 25%.
Example of the 10% Rule – For a $250K house that had $50K in kitchen remodeling, the maximum adjustment for the kitchen upgrade would be $25K (10% of $250K). This shows that improvement costs don’t always directly translate to increased value.
Common Adjustments in Residential Appraisals – Location, lot size, square footage, number of bedrooms and bathrooms, garage spaces, age and condition, quality of construction, and recent renovations are all factors considered for adjustments. These help ensure that the properties are comparable when valuing the subject property.
Positive vs. Negative Adjustments – Positive adjustments are made when the subject property is superior to the comparable sale, while negative adjustments occur when the subject property is inferior. These adjustments help align the comparable sales with the subject property’s characteristics.
Special Considerations – Appraisers also take into account market conditions, functional obsolescence (outdated design or functionality), and external obsolescence (factors like nearby noise or environmental conditions).
Market Support – Adjustments should always be based on local market data rather than purely on costs. Paired sales analysis, where similar properties are compared to extract value differences, is a common method appraisers use to determine appropriate adjustments.
Challenges and Impact – Making adjustments can be subjective, especially when market data is limited or features are unique. However, these adjustments play a critical role in providing a more accurate estimation of the subject property’s value.

Do all Appraisers Adjust the Same Way?

No, appraisers do not all adjust the same way. Even the same appraiser may handle adjustments differently depending on the data available in each neighborhood. Appraising is not an exact science, and appraisers can make mistakes too.

For example, in a new construction neighborhood where I sold several identical model homes, different appraisers made different adjustments for the same type of property:

House 1 Adjustments – The appraiser valued the above-grade square footage at $60/sq ft and gave a $6K adjustment for full landscaping. The final opinion of value was $380K.
House 2 Adjustments – A different appraiser valued the above-grade square footage at $80/sq ft and made no adjustment for landscaping. The final opinion of value was $377K.

Notably, these two appraisers used completely different comparable sales for the same model homes. In fact, a later sale of a similar home used these two appraisals as comps, despite some inconsistency in the adjustments.

Additionally, there was an error on one appraisal regarding the number of garage bays, which happened to benefit the buyer. Had it been in the seller’s favor, that’s the sort of error that could have been contested.

I’ve even seen the same appraiser make different adjustments for the same model home in the same neighborhood on separate occasions.

The point is that while appraisals are useful, they’re not always precise. It’s important to consider that an appraisal is an informed opinion, not an exact number, and to take it with appropriate caution.

Price per Square Foot Adjustments

When making adjustments for price per square foot, appraisers follow some general guidelines, though these can vary by market and property type.

Value Breakdown – Some appraisers suggest dividing a property’s total value into thirds: one-third for the land, one-third for the square footage, and one-third for features and upgrades. This breakdown helps in understanding how different aspects contribute to the overall property value and guides the adjustment process.
Adjustment for Size Differences – Typically, appraisers will adjust for differences in size using about 25% to 30% of the total price per square foot. This allows them to account for differences in the livable area of the property without over- or under-weighting the value.
Exceptions for Acreage – These rules may not apply if the property has a large amount of acreage, as land value plays a much more significant role in those cases.
Market Variations – Nationally, the percentage used for size adjustments is typically between 20% and 30%, but this can vary based on the local market. In higher-end properties, appraisers often lean toward the 30% mark to reflect the value of additional square footage.

Basements: Below Grade Square Footage

When adjusting for basements, appraisers rely on actual sold market data from the local area.

In my market, where the above-grade square footage is valued between $60 to $80 per square foot, below-grade (basement) adjustments follow these typical guidelines:

$10 per Square Foot for Unfinished Basements – Unfinished basements are typically valued at around $10 per square foot.
$15 per Square Foot for Finished Basements – Finished basements are generally valued at around $15 per square foot. However, this value can vary depending on the quality of the finish. For lower-end finishes at the time of these numbers, the cost to finish a basement was about $30 per square foot, meaning the cost of finishing was not fully reflected in the appraised value. For example, in one neighborhood, we finished basements in several new construction rental properties. The first two properties I bought did not appraise for the full purchase price, and I had to pay the difference between the purchase price and the appraisal value. However, by the time we sold the exact same model with finished basement for the third property to a client, the appraiser used the two previous sales with finished basements as comparables, which allowed the third property to appraise for the full purchase price.
Walkout Basements – Walkout basements add additional value, typically up to +5%.
Daylight Basements – Daylight basements, with partial exposure to natural light, may add up to +2% in value.
Extra Bathrooms – Regardless of where they are located, additional bathrooms in the basement add value to the property.

These values will vary by market, but these rules provide a general framework for how appraisers adjust for below-grade square footage.

Differences in Number of Bedrooms

Appraisers usually don’t make a separate adjustment for the number of bedrooms because the square footage adjustment typically accounts for it.

However, adjustments may be made if there’s a functional issue.

Functionality Issues – If a property is in a neighborhood where most homes have three bedrooms and the subject property has only two, an adjustment may be necessary. This type of adjustment might range from $3K to $5K per missing bedroom.
1-Bedroom Houses – Homes with only one bedroom should only be compared to other one-bedroom houses to maintain accuracy in the appraisal.
Example from a Recent Appraisal – In one case, the appraiser noted that no separate adjustment for bedrooms was needed. The square footage adjustment was sufficient to cover the typical variances. The appraisal indicated that homes with more bedrooms often had smaller, less desirable rooms, which offset the benefit of having additional bedrooms.

Bathrooms

When adjusting for the number of bathrooms in a property, appraisers consider the impact of both half and full baths on the overall value.

Half Baths – Adding or having an additional half bath typically increases the property’s value by $2K to $3K. These bathrooms offer convenience but don’t have the full functionality of a shower or tub, leading to a smaller value increase.
Three-Quarter to Full Baths – A three-quarter or full bath, which includes a shower or tub, adds more value, usually ranging from $5K to $7K. These bathrooms provide more utility, making them more significant in appraisals.

Garage Spaces

Garage spaces can have a significant impact on a property’s value, with adjustments typically falling within certain ranges.

$5K to $8K per Space – Each additional garage space generally adds $5K to $8K to the property’s value, depending on the market and the appraiser’s assessment.
Tandem Spaces – Tandem garage spaces, where cars are parked one behind the other, are usually valued at half the amount of a regular garage space. However, this can vary depending on the appraiser’s opinion and the local market.
Limited Parking Areas – In areas where parking is scarce, the value of garage spaces can be as much as three times higher than in areas with more available parking options.
Comparable Sales – The most accurate way to value garage spaces is to find comps with the same number of garage spaces in the same part of town. If this isn’t possible, using paired sales to compare similar properties with varying garage space counts is the next best approach.

Other Features

In addition to core factors like square footage and garage spaces, appraisers also consider various other features that can impact a property’s value.

Fireplaces – Fireplaces generally add $1K to $2K to the value of a property. However, if the fireplace is particularly high-end or decorative, sometimes referred to as “fancy nice,” it could add up to $5K.
Air Conditioning (AC) – Central air conditioning typically adds $2K to $4K to a home’s value. According to one appraiser, AC is now expected in many markets, so its value may be more aligned with replacement costs rather than a premium feature.
Decks and Patios – The value added by decks or patios is usually based on the cost of materials minus labor. A basic deck or patio typically adds $2K to $3K in value. If it’s covered, you could add another $1K. More elaborate or high-end decks and patios can add significantly more value depending on the level of customization and quality.

Upgrades

Upgrades to a property can affect its value, but how much depends on various factors, including the appraiser’s judgment and local market conditions.

Flooring – Some appraisers don’t make adjustments for flooring because it can be seen as a buyer preference. However, adjustments are typically made when comparing carpet to hardwood, as hardwood is often more desirable. In cases of partial hardwood flooring, appraisers may not break it out into separate adjustments but instead give a general bump for higher quality, which may include things like quartz countertops in the same category.
Updated Kitchen – The value of an updated kitchen can vary widely. If the kitchen remodel adheres to the 10% rule (where the cost of the upgrade is 10% or less of the home’s value), you might see nearly full value reflected in the appraisal. However, the adjustment often depends on the appraiser and, as some jokingly say, what they had for breakfast that day, indicating the subjective nature of appraisals.
Countertops – Countertops, especially high-end materials like granite or quartz, can add significant value. In some appraisals, the adjustment may be minimal, while in others, granite or quartz countertops could add as much as $25K to $30K, particularly in kitchens or bathrooms where these features are considered a luxury.

House Fronts or Backs to Busy Street?

When a property fronts or backs to a busy street, appraisers often make adjustments to account for the impact on the property’s value.

Fronting a Busy Street – Homes that face a busy street can see a value reduction of up to 10%. The noise and traffic typically make these properties less desirable.
Backing to a Busy Street – Properties that back to a busy street tend to have a smaller adjustment, usually between 2% and 3%. A fence can help mitigate some of the effects, so the primary issue becomes noise.
Backing to a Major Highway with Sound Barrier – If the property backs to a major highway but has a sound barrier wall, the adjustment might be between 3% and 5%, depending on how much the barrier reduces noise and visibility.
Fronting to a Cul-de-Sac – Properties that front to a cul-de-sac may receive a positive adjustment of up to 5%, as cul-de-sacs are often considered more private and safer. In some cases, the appraiser may not make any adjustment if comparable properties have similar characteristics to the subject property.

Views, Open Space, Golf Courses

Adjustments for views, open spaces, and proximity to golf courses can significantly impact a property’s value, but the extent of the adjustment depends on the quality and uniqueness of these features.

Backs to Open Space with Views – Properties that back to open spaces with exceptional views can receive an adjustment of up to 10%. The more stunning the view, the higher the value added.
General Views – Basic views tend to add less value, usually between 1% to 2%, depending on how impressive the view is.
On a Golf Course – Properties situated directly on a golf course can see an increase in value of up to 10%. However, if comparable sales are also on a golf course, the appraiser may not adjust at all, as those properties share the same feature.
Paired Sales – It’s always better to use paired sales when evaluating these features, as the value could be lower than expected without proper market comparisons.
Fronts to Railroad Tracks – On the other hand, properties that front to railroad tracks typically see a negative adjustment of about -10%, as the noise and disruption lower the desirability of the home.

Solar

When adjusting for solar panels, appraisers typically look at comparable sales, but there are now more advanced methods available.

Paired Sales for Solar Panels – Traditionally, appraisers would need to find a comparable sale (paired sale) that included solar panels and sold for more. This helps demonstrate the added value of the solar system.
Income Capitalization Approach – A newer method involves using the income capitalization approach. With this, the appraiser adjusts the value based on the amount of income the solar panel system can generate, rather than just relying on comparable sales. Tools like PVvalue.com can be used to calculate the system’s potential income and inform the adjustment.

However, there are a few important considerations to keep in mind:

Ownership – The solar panel system must be owned by the homeowner. If the system is leased, no value can be attributed to the property from the solar panels.
Qualified Appraisers – The appraiser must be properly qualified to assess solar panels. They need to have completed the “Valuation of Sustainable Buildings Professional Development Program” and the “Residential and Commercial Valuation of Solar” courses to accurately determine the system’s value.

Adjusting for Age, Condition & Quality

Appraisers make adjustments based on a property’s age, condition, and quality to ensure an accurate comparison between the subject property and comparable sales.

Condition Ratings (C1 through C6) – Properties are rated based on their condition, with C1 being brand new and C6 indicating severe damage or deferred maintenance requiring significant rehab. For example, a 15 to 20-year-old house in reasonable condition might receive a C3 rating, indicating it’s in average condition for its age but well-maintained.
Quality Ratings (Q1 through Q6) – Quality ratings assess the construction and finish quality of the property. Q1 represents high-end, custom-built homes with top-tier materials and craftsmanship, while Q6 applies to do-it-yourself or very basic construction. The exact definitions of these ratings can be found toward the end of the appraisal report.
Adjustments for Condition vs. Age – Some appraisers may prioritize adjusting for a property’s current condition rather than its age, especially if the home has been well-maintained or significantly updated. While age can be a factor, condition often plays a bigger role in determining value.

These adjustments help appraisers reflect the true market value of a property by considering both its physical state and the quality of its construction.

Appraisal Summary of Adjustments

Some appraisers summarize their adjustments at the end of the report, giving a clear breakdown of how they calculated value differences between the subject property and the comparables.

These summaries help clarify how various features of the property influenced the appraiser’s final valuation.

For example, one appraisal might provide this summary:

“For differences over 100 square feet: Above Grade Square Footage is adjusted at $70 per square foot. Basement square footage is adjusted at $15 per square foot with an additional $15 per square foot for finished space. Adjustment for bathrooms is $6,000 for full bath and $3,000 for a half-bath. Central air conditioning is adjusted at $2,000. Garages are adjusted at $7,000 per car.”

In another appraisal, the adjustments might be calculated differently:

“Square footage was adjusted at $35 above grade, $25 per finished basement sq ft, $5 per unfinished basement sq ft. Baths were adjusted at $2,000 per full and ¾ baths, and $1,000 per ½ baths. Garages are adjusted at $10,000 per attached stall and $5,000 per built-in tandem stall. Gas fireplaces and Central air were adjusted at $4,000.”

These examples illustrate how appraisers use specific rates to adjust for features like square footage, bathrooms, and garages, reflecting how these characteristics impact the overall value of a property.

Impact of Appraisals on Loan-to-Value (LTV) Ratios

Appraisals play a fundamental role in determining the Loan-to-Value (LTV) ratio, which directly affects how much a lender is willing to loan you for a property. The LTV ratio is the relationship between the loan amount and the appraised value of the property.

Lenders typically use the appraised value, not the purchase price, to calculate the LTV ratio.

For example, if a lender has a maximum LTV threshold of 80%, this means they are willing to loan up to 80% of the appraised value. If the appraisal comes in lower than the purchase price, the lender may reduce the amount they’re willing to lend, potentially requiring the buyer to cover the gap with additional funds at closing.

To mitigate risks if an appraisal comes in low, you have several options.

Negotiate – First, you could negotiate with the seller to lower the purchase price to align with the appraised value.
Challenge – Another option is to challenge the appraisal by providing additional comparable sales or correcting any factual errors.
Pay Difference – If neither option works, you could choose to pay the difference in cash between the appraised value and the purchase price.

If you believe the appraisal is flawed but really want to purchase the property, consider finding another lender or paying to get a second appraisal.

Lastly, you can protect yourself by including an appraisal contingency in your contract, which gives you the option to walk away or renegotiate if the property appraises for less than the agreed-upon price.

Special Considerations – Flipping a House

When flipping a house, there are a few special considerations to keep in mind during the appraisal process to help ensure that your work is fully reflected in the appraised value.

First, save all your receipts. This documentation is crucial for justifying the costs of the improvements you’ve made.

Along with the receipts, create a detailed list of the work completed, breaking down each renovation or upgrade. This list will give the appraiser a clear understanding of the extent of the improvements and their potential impact on the home’s value.

Providing this information directly to the appraiser can be highly beneficial.

In my experience, appraisers often use this kind of documentation to help justify the higher value of a recently flipped property. Even if you’re not flipping the house but have completed recent renovations, it’s still a good idea to provide this information to ensure the upgrades are properly accounted for.

In general, the more detailed and organized information you can give to the appraiser, the better.

This helps them make more accurate adjustments and ensures you get the best possible appraisal based on the work you’ve done.

Why Do Many Appraisals Match the Sale Price?

Many times, appraisals come in at the sale price, and there are a few reasons for this.

One thing to remember is that appraising property is not an exact science. As one appraiser put it: “If we are close, we will probably give it to you.”

Appraisers aim to provide a fair and accurate value, but there is some flexibility in their approach, especially if the numbers are close enough.

That said, it’s not always the case. We’ve seen instances where appraisals come in lower than the contract price, but we’ve also seen appraisals exceeding the sale price by $20,000 or more.

In fast-moving, appreciating markets, if the appraisal comes in exactly at the sale price, it’s often a sign that the appraiser is justifying the agreed-upon value. If this happens, you might want to simply say, “Thank you” and move on.

In highly competitive markets, where multiple offers and bidding wars are common, many real estate agents suggest sellers price their homes at a level they believe the appraiser can justify based on comparable sales. Then, they let the market drive offers higher, knowing that they will negotiate to have the buyer cover the difference between list price and offer price in cash if the appraisal doesn’t match their offer. This strategy helps ensure that the appraisal doesn’t become a sticking point as long as it supports the original list price.

Rules for Interacting with an Appraiser

When interacting with an appraiser, it’s important to follow strict rules to maintain the integrity and independence of the appraisal process. Violating these rules can lead to legal consequences and impact the accuracy of the appraisal.

Coercion or Intimidation – No one with an interest in the property transaction—whether a buyer, seller, lender, or real estate agent—can offer compensation, threaten, bribe, or pressure an appraiser or appraisal company to change their valuation. The appraised value must be based solely on the appraiser’s independent judgment and not influenced by any outside parties.
Misrepresentation – It’s illegal to misrepresent or attempt to mischaracterize the appraised value of a property to secure a more favorable loan or pricing arrangement.
Targeted Value Influence – Any attempt to encourage the appraiser to reach a specific value, such as providing a target price, to facilitate the transaction is prohibited.
Withholding Payment – It’s not allowed to withhold or threaten to withhold timely payment for an appraisal or appraisal services if they are provided in accordance with the contract.

However, there are exceptions where interested parties can interact with the appraiser, as long as these interactions don’t violate their independence:

Providing Additional Information – You can ask the appraiser to consider additional property information, such as new comparable sales that they might have missed, to help support or adjust the appraisal.
Requesting Clarification – You are allowed to ask the appraiser for further detail or explanation regarding their value conclusions. This can help clarify any uncertainties in the report.
Correcting Errors – If there are factual errors in the appraisal, such as incorrect square footage or the number of rooms, you can request that these errors be corrected.

Understanding and adhering to these rules ensures the appraisal remains an objective and independent process, protecting the integrity of the transaction.

Challenging an Appraisal

Challenging an appraisal is a process that can be undertaken if you believe the appraised value is inaccurate or unfair.

As a buyer, it’s often a good idea to first try renegotiating the sale price with the seller.

However, if renegotiation doesn’t work or you believe the appraisal contains errors, you can dispute it.

Here are valid reasons to bring a protest to the appraiser:

Missed Comparable – If the appraiser overlooked a recent comparable sale that supports a higher value, this is a key point to raise.
Incorrect Characteristics/Facts – Errors such as the wrong square footage, incorrect number of bedrooms or bathrooms, or other factual inaccuracies should be addressed.
Missed Adjustments – If common adjustments for things like garage spaces or upgraded features seem to have been missed, you can bring this up.

The process for disputing a low appraisal typically involves gathering the relevant data and comparables and presenting them to the appraiser for reconsideration.

You’ll need to submit the additional information, explain why you believe the original appraisal was flawed, and support your argument with evidence from the market.

This step-by-step process may vary slightly depending on your lender, but the key is to provide clear, factual data that justifies a change in the appraisal value.

What You Can/Should Give to Appraiser

When working with an appraiser, it’s helpful to provide them with certain documents and information to ensure they have all the details necessary to accurately assess the property. While the appraiser is expected to do their own research, providing additional context and documentation can make their job easier and lead to a more accurate appraisal.

Here’s what you can and should give to the appraiser:

Sales Contract and Amendments – The appraiser typically gets this from the lender, but ensure they have a copy of the full contract and any amendments to understand the agreed-upon terms.
Comparable Sales – Provide comps that you feel are relevant, along with notes about any significant differences. For example, if one of the comps had an issue like pet odor or cigarette smoke that could affect its value, make sure to mention that, as the appraiser may not be aware of these issues.
Comparable Sales to Eliminate – If there are comps you want excluded, such as short sales or foreclosures that aren’t representative of market value, explain why they shouldn’t be considered as true comparables.
Info on Multiple Offers – If your property received multiple offers, providing this information may help the appraiser understand the demand for your home.
Floor Plan – A floor plan can help the appraiser understand the layout and how the property compares to the comps.
List of Upgrades and Costs – If you’ve made any recent upgrades, provide a detailed list along with receipts. This will help the appraiser accurately account for improvements and their impact on the property’s value.

Reading an Appraisal: Main Parts

Reading an appraisal can feel overwhelming if you’re unfamiliar with the key sections.

Understanding each part can help you verify the accuracy of the report and make sure nothing was missed.

Here are the main parts of an appraisal and what each section typically includes:

Basic Data: Subject Property; Contract Details; Neighborhood – This section outlines the essential information about the property being appraised, including its location, the terms of the contract, and neighborhood characteristics. You should check this data against the contract and verify that the basic property information is correct.
Sales Comparison Approach Table of Comparables with Adjustments – This table lists the comparable properties (comps) used to assess the subject property’s value. Pay close attention to the adjustments made for differences between the subject property and the comps. The comments in this section often explain how these adjustments were calculated and why certain comps were selected.
As-Is or Subject to ___________ Conditions – This section will specify whether the appraisal is based on the current state of the property or if certain repairs or improvements are required before the appraisal value is valid.
Opinion of Value – The appraiser provides their final opinion of value, which may be derived from one or more approaches: sales comparison approach, cost approach, and/or income approach.
Other Approaches if Used – In some cases, other approaches to valuation may be developed, depending on the property type or lender requirements.
Additional Comments/Analysis – Often found in a separate addendum, this section provides more in-depth details about the appraiser’s methodology, assumptions, and any unique considerations taken into account. There can be a wealth of information here about how the appraiser came to their conclusions.
Subject Photos & Comparable Photos – Visual documentation of the property and the comparables used in the report. These photos provide context for the condition of the properties being compared.
Floor Plan and Square Footage Measurements – This part details the layout and exact measurements of the property. It’s essential to verify these measurements as they directly affect the appraisal.
Map of Comps – A visual map showing where the comparables are located in relation to the subject property. This helps you understand the geographic proximity of the comps.
Market Conditions Addendum – This section reflects the current market conditions and whether the local real estate market is appreciating, depreciating, or stable. The appraiser may use this addendum to adjust the property’s value based on the timing of comparable sales.
Uniform Appraisal Dataset Definitions – If you encounter abbreviations or unfamiliar terms, this section defines them according to the Uniform Appraisal Dataset (UAD) standards. This is helpful for decoding some of the more technical parts of the report.

Appraiser’s Comments on the Appraisal Process

The following quote is taken directly from an appraisal report and provides insight into how appraisers approach the valuation process, particularly how they handle differences between properties. Let’s take a look at the appraiser’s explanation before highlighting some key points.

In the appraisal process, the appraiser searches for recent transfers that are as similar to the subject as possible. Homes are rarely identical in every way. Generally, there are differences and amenities that the typical buyer would either pay more or less for. The appraiser identifies the differences between properties through research and data collection. The comparables are adjusted for differentials that are recognized by the typical buyer from this market. The dollar amount of the adjustments is taken from the market, as well as from the appraiser’s general knowledge of the market. The dollar amount of each adjustment may differ from development to development, and is dependent on overall house quality, market demand, and market appeal of each individual development and each individual differential. The amount of an adjustment is determined by paired data analysis. Per the dictionary of real estate appraisal, third edition, page 258, the definition of “paired data analysis” is: “a quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic’s effect on value or rent”. This appraisal office performs continuous paired data analysis on numerous adjustable items, recognized by specific markets, to determine adjustments for those items as they relate to those specific markets.

Based on those comments, here are some of the most important points to call attention to:

Homes Are Rarely Identical – Appraisers acknowledge that even comparable properties will have differences that require adjustments. This means each property is unique, and the appraiser’s job is to account for those differences.
Adjustments Based on Market Data – Adjustments for differences between properties are taken from the market itself, combined with the appraiser’s knowledge of the local real estate market. This highlights the importance of accurate, up-to-date data.
Paired Data Analysis – The appraiser uses paired data analysis to measure adjustments. This technique isolates a single characteristic’s impact on value by comparing two otherwise identical properties, ensuring that adjustments are grounded in market behavior rather than guesswork.
Market-Specific Adjustments – The dollar amount for adjustments can vary depending on the market, the quality of the homes in question, and the individual development. This reinforces that appraisals are highly localized and sensitive to the nuances of each market.

These points help illustrate the complexity of the appraisal process and why it’s important to understand the factors that influence property valuation.

Ultimate Guide to Appraisals for Real Estate Investors