How Do Real Estate Appraisals Work?

What they are, why they’re useful, and what they mean for you

Male and female real estate appraisers talking and pointing upwards holding blueprints next to ladders

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When purchasing or selling a home, a real estate appraisal is an integral part of the process. Appraisals impact how much you pay for a home. But appraisals also determine how much equity you can pull from your house if you’re refinancing or getting a home equity loan, and what you’ll get if you’re selling your home.

Whether you’re a residential homebuyer, a seller, or an aspiring real estate investor, learn the basics of an appraisal, why an appraisal is useful, how it’s conducted, and what various appraisal terms mean.

Key Takeaways

  • A real estate appraisal provides an expert opinion of a property’s value.
  • Appraisals can serve various purposes, including helping procure a loan, setting a listing price, and making an investment decision.
  • An appraisal is not the same thing as a home inspection.
  • Depending on several factors, an appraiser will use one of three methods to calculate an opinion of value: the sales comparison method, the cost method, or the income capitalization method.
  • Several possible solutions exist for buyers and sellers if a property’s appraised value is lower than the contracted sale price.

What Is a Real Estate Appraisal?

A real estate appraisal is an objective, qualified expert’s analysis of a property to help determine its value. Lenders commonly use appraisals before financing property purchases. The lender wants to ensure the amount of money being loaned isn’t more than the property is worth. The appraisal also reassures the buyer that the price paid isn’t higher than the home’s market value.

Lenders and potential buyers are not the only ones ordering appraisals. There are many reasons to get an appraisal. For example, a seller may want an appraisal to help decide on a competitive listing price before selling. Appraisals can even be used for dispute resolution (e.g., divorce settlements) or estate planning purposes.


In some cases, when buying a “flipped” house, you may need two inspections. The lender must pay for the second appraisal and isn’t allowed to charge you for it.

Appraisal vs. Inspection: What’s the Difference?

A real estate appraisal and an inspection may seem similar at first. An expert examines a property and ultimately issues a report about it. While both involve analyzing the condition of a property for real estate transactions, the methods and purposes differ.

An appraisal is an analysis of a property by an expert to determine what the Appraisal Institute calls an “opinion of value,” or how much money the property is worth. An inspection is an analysis of a property’s physical condition and material defects, or how much repair it needs.

While an appraisal is generally required by lenders before financing a home sale, an inspection is something an individual buyer or property owner chooses to have completed.

Single-Family vs. Multi-Unit Appraisals

For a single-family home, an appraiser typically relies primarily on data about similar properties that have sold or are pending sale to help determine the market value of the property in question. All appraisal types include some analysis of comparable properties nearby that have sold recently, also known as “comps.”

Multi-unit properties or multifamily homes are usually purchased for investment purposes, so appraisers also rely on calculations about the property’s possible production of income and expenses. The appraisers then typically calculate values per unit and a total value for each multifamily property. Since this process is more complex, multi-unit appraisals are more expensive.

Common Real Estate Appraisal Methods

Typically, every appraisal involves research and analysis of local property values in the market, current supply and demand, and other economic factors that could raise or lower those values, along with evaluation of the property’s specific characteristics and analysis of comparative home sales.

However, depending on the type of real estate, the reason for the appraisal, and what relevant data is available, an appraiser will determine the property’s value through the sales comparison method, the cost method, and/or the income capitalization method.

Sales Comparison Method

The sales comparison method relies primarily on data about the sale of comparative properties. By looking at properties most similar to the subject property, the appraiser identifies a range for the property’s value.

The appraiser will consider a number of factors when determining how similar the comps are to the property in question, including:

  • Location
  • Physical characteristics
  • Economic characteristics
  • Market conditions at the time of sale
  • Conditions of the sale itself
  • Use and zoning

When calculating a useful value range from a comp, the appraiser may make dollar or percentage “adjustments.” These adjustments add to or subtract from its sale price based on advantages or deficiencies in the subject property. For example, if one comp has an outdated kitchen, but the subject property has a recently upgraded kitchen, the appraiser may raise the value range derived from that comp.


The sales comparison method is typically the most reliable way of indicating value for residential homes. According to the Appraisal Foundation—the organization tasked with determining appraisal standards and appraiser qualifications—“[sales comparison] most directly reflects the actions of buyers and sellers in the market.”

Cost Method

If a property doesn’t really have any true comps, the cost method of appraisal may be most appropriate. This could be because the property contains new or specialized improvements, is unique, or isn’t commonly on the market.

In this method, the appraiser determines the value of the land (not counting any buildings). The appraiser then calculates what it would cost to build the same or similar type of improvements, and adds that cost to the land value.

Finally, the appraiser subtracts an amount for how much any structures have depreciated over time; in other words, how much value a property has lost due to aging, wear and tear, changes in the surrounding area, and more.

Income Capitalization Method

Whereas the previous two appraisal methods discussed deal more with residential real estate, this method is used specifically to determine the present value of an investment property such as multifamily properties.

With this method, the appraiser looks at a variety of factors to form an opinion of a property’s future investment benefits, such as:

  • Intended use
  • Estimated profits
  • Estimated losses
  • Estimated expenses
  • How long and how consistently is the property likely to provide income
  • Estimated value of the property if and when it is eventually sold again
  • Rates of return for similar properties

What Does an Appraisal Cost?

Appraisal costs vary widely depending on the local market. The Organization of Real Estate Professionals’ 2021 Appraiser Fee Survey of professional appraisers across the U.S. revealed a range of pricing in most markets. For example, appraisers in the San Francisco area indicated charging anywhere between $301 to more than $751 to appraise a single-family home. More than half of appraisers charged $550 or more. In Oklahoma, statewide, most appraisers surveyed reported charging $550 or less.

The homebuyer typically pays the appraisal fee—sometimes upfront and sometimes as part of the closing costs at the official time of closing. If you’re a homeowner or buyer wanting an appraisal for your purposes, such as determining a list price, settling a divorce, or purchasing with cash, you’ll both order and pay for the appraisal yourself.

After the Appraisal

After viewing a property in person, compiling and analyzing data, completing calculations, and applying one of the three valuation methods discussed, the appraiser is ready to determine a “final opinion of value.” This is the number that lenders, hopeful homeowners, and potential investors await.

What’s in an Appraisal Report?

The final opinion of value arrives in an appraisal report that supports the appraiser’s estimate of the home’s value. Any credible appraisal report should include:

  • The appraiser’s methods for defining and determining value, including how the property was inspected, and any lender-specific requirements
  • Clear identification of the subject property and its relevant characteristics and features
  • The client and intended use of the property
  • The report’s purpose, such as financing or investing
  • Market area and comps used for analysis


Federal and state law and professional standards require appraisers and the appraisal process to use correct methods and techniques. The appraiser should produce an independent appraisal free of external influence, fraud, or discrimination. If you have a concern about your appraisal, contact the Appraisal Complaint National Hotline.

What if the Appraisal Comes in Lower Than the Contracted Price?

Sometimes the opinion of value on an appraisal can come in lower than the sale price a buyer and seller have agreed upon. Possible reasons for this could be that the property was overpriced, prices are artificially inflated in the market, or the appraiser was inexperienced or made an error. Since lenders won’t loan more money than a property is worth, a low appraisal presents a problem for both buyers and sellers.

For buyers, possible solutions to a low appraisal include asking the seller to lower the sale price, making up the difference in cash, or consulting with an attorney about canceling the sale. Depending on contract conditions, the buyer may be forfeiting earnest money. You can also contact your lender. The lender can request that the appraiser consider additional information, correct errors, or explain the value.

For sellers, possible solutions might include lowering the price or disputing the appraisal with the lender in hopes they will order a second appraisal. It’s best to dispute the appraisal in writing if you feel the appraiser missed critical details about the property or available comparable properties. The appraiser may ask a second appraiser to review the appraisal, or conduct a second appraisal—but isn’t required to do so.

Frequently Asked Questions (FAQs)

Who orders the appraisal in a real estate transaction?

When a buyer applies for a mortgage to purchase a property, federal lending regulations require the lender to order the appraisal. You may be asked to pay for the fees associated with the appraisal. If, for some reason, another bank initiated an appraisal, the lender is allowed to use that appraisal, provided they review it and deem it acceptable.

How long does a real estate appraisal take?

The appraiser typically only needs under an hour to assess your property in person, unless the home has unique features or is hard to measure. The full appraisal process can take several days to a week or more, depending on the appraiser's workload, the size of a property, and the complexity of comps in the area. Lenders are required to send you a copy of your appraisal as soon as the report is completed, and no later than three days before your loan closes.

How long is a real estate appraisal good for?

Generally, a lender determines an appraisal’s expiration. For example, an appraisal for a Fannie Mae loan is good for four months from the date on the report. The appraiser must perform a simple appraisal update if it's more than four months but less than 12 months old. After 12 months, securing a mortgage requires a new appraisal. For an FHA loan, an appraisal is good for 120 days and can only be extended by 30 days.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Consumer Financial Protection Bureau. "I Was Told I’m Buying a Home That Was Flipped and That I Have To Get a Second Appraisal. How Does That Work?"

  2. Appraisal Institute. "Understanding the Appraisal."

  3. The Appraisal Foundation. "A Guide to Understanding a Residential Appraisal."

  4. Organization of Real Estate Professionals. "Appraiser Fee Survey From OREP/Working RE - 2021."

  5. Organization of Real Estate Professionals. "Appraiser Fee Survey From OREP/Working RE - 2021: California."

  6. Organization of Real Estate Professionals. "Appraiser Fee Survey From OREP/Working RE - 2021: Oklahoma."

  7. Consumer Financial Protection Bureau. "Do I Have the Right To Receive a Copy of My Home Appraisal?"

  8. Fannie Mae. "Age of Appraisal and Appraisal Update Requirements."

  9. HUD. "HUD HOC Reference Guide."

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