What is the purpose of a property appraisal?
An appraisal is generally required by the lender in order to establish that the value of the property will be sufficient collateral for the amount of the loan. The appraisal fee is generally paid by the buyer, sometimes required at the time of the loan application. Depending on the property, an appraisal can range from hundreds of dollars to thousands of dollars for large commercial properties.
An appraisal is done by an independent appraiser who will generally visit the property and inspect the interior and exterior. However, the appraiser is not performing the same service as a home inspection. Generally, the cleanliness of the interior will not add to or diminish the appraisal value. The appraiser considers many other factors, beyond the inspection, to establish the fair market value, such as comparable values, historic sales and market demand for that area.
Market values fluctuate over time and also vary from neighborhood to neighborhood, causing appraisals to become outdated. Lenders will require a new appraisal if any refinancing is done, and tax assessors generally re-assess property annually. The value established by your lenders appraisal will not change the assessment set for property taxes as county tax assessors do their own property evaluations.
In either case, the buyer should monitor the appraisals for fair treatment in relation to similar properties in the surrounding area and in view of the standards set for appraisers by state licensing boards. For tax purposes, there is often a protest deadline. In the case of a loan, the buyer should be comfortable with the appraisal before committing to a firm offer and before the loan closes. Any concerns or complaints should be brought to the attention of the lender or the state regulatory board. Although the appraisal primarily protects the lender, it can also benefit the buyer or landlord by:
- Providing assurances that the property is not over-valued
- Justifying the amount of the loan
- Qualifying you for certain terms
- Protecting against negative home equity
- Aiding tax and estate planning
- Helping determine insurance valuations
- Determining the feasibility of property improvements, refinancing or additional financing