Real Estate
Definition
A licensed appraiser's professional opinion of a property's market value, required by lenders to ensure the loan amount does not exceed the property's worth.
A home appraisal is a formal, unbiased estimate of a property's fair market value conducted by a licensed or certified appraiser. Mortgage lenders require an appraisal before approving a home loan to confirm that the property is worth at least as much as the loan amount — protecting the lender's collateral in case the borrower defaults. The appraisal is ordered by the lender but paid for by the borrower, typically costing $300 to $600 for a standard single-family home.
The appraiser inspects the property's condition, size, layout, and features, then analyzes recent sales of comparable properties (called 'comps') in the same area. They consider factors such as square footage, number of bedrooms and bathrooms, lot size, age and condition, upgrades, location, and market trends. The result is an appraisal report that states the appraiser's opinion of value along with the methodology and comparable sales used.
If a property appraises at or above the purchase price, the transaction proceeds normally. If it appraises below the purchase price — a low appraisal — the lender will only finance based on the appraised value, not the contract price. This creates a gap: the buyer must either make up the difference in cash, renegotiate the purchase price with the seller, or walk away using an appraisal contingency. Low appraisals are one of the most common reasons real estate deals fall apart.
Refinances also require appraisals, and the value determined directly affects how much equity can be accessed. For investment properties, appraisals follow slightly different methodologies that may also consider income potential alongside comparable sales.
A low appraisal can upend a transaction even when both buyer and seller have agreed on price. Understanding how appraisals work, what drives value in your specific market, and how to respond to a low appraisal requires experience and local knowledge that most buyers do not have on their first or second transaction.
A skilled real estate professional can help you price an offer appropriately to minimize appraisal risk, advise on whether to contest a low appraisal (buyers have the right to challenge with additional comps), and help negotiate a price adjustment when an appraisal comes in short. These interventions can save thousands of dollars and prevent a deal from collapsing unnecessarily.