Glossary · Pricing & valuation
Appraisal
An appraisal is a formal, independent opinion of a property's market value prepared by a state-licensed or certified appraiser. Mortgage lenders almost always require one before approving a loan, because the home serves as collateral and the lender must confirm it is worth the amount borrowed. The appraiser inspects the property, analyzes comparable sales, and documents the value in a written report.
How does an appraisal work?
A licensed appraiser inspects the property, notes its size, condition, and features, then compares it to recent nearby sales. The appraiser adjusts each comparable for differences to reach an opinion of value. The lender receives a written report and uses the figure to confirm the loan is adequately secured.
The appraiser visits the home, measures it, and evaluates condition and upgrades. Photos and notes support the analysis.
Recent comparable sales anchor the valuation. The appraiser adjusts for differences in size, location, and features, much like a CMA but under regulated professional standards.
Why does an appraisal matter in a home sale?
The appraisal protects the lender by confirming the home is worth the loan amount, and it protects the buyer from overpaying. Because the loan is tied to the appraised value, a low appraisal can stall or unravel a sale, forcing the parties to renegotiate, add cash, or walk away.
Lenders finance the lower of the sale price or the appraised value. If the appraisal falls short, the buyer must bridge the gap or the deal changes.
For buyers, the appraisal is a safeguard. It offers an independent check that the agreed price aligns with market evidence.
What happens if the appraisal comes in low?
A low appraisal means the home valued below the agreed price, so the lender will not finance the full amount. The buyer can pay the difference in cash, the parties can renegotiate the price, or the buyer can invoke an appraisal contingency to exit the contract without losing earnest money.
Renegotiation is common. Sellers may lower the price rather than restart the search for a buyer whose own appraisal could match.
If neither side moves and no cash covers the gap, an appraisal contingency lets the buyer cancel and recover the earnest money, depending on the contract terms.
Worked example. For example, a buyer agrees to pay 400,000 dollars for a home and applies for a mortgage. The appraiser values it at 385,000. The lender will finance only against 385,000, leaving a 15,000 gap. The buyer can cover it in cash, negotiate a lower price, or use an appraisal contingency to walk away.
Common mistakes with Appraisal
- Assuming the appraisal will automatically match the agreed purchase price.
- Waiving an appraisal contingency in a competitive offer without the cash to cover a shortfall.
- Confusing an appraisal with a home inspection, which evaluates condition rather than value.
- Expecting recent upgrades to raise the appraised value dollar-for-dollar with their cost.
- Treating the appraised value as identical to the tax assessed value, which follows different rules.
Appraisal Gap
The difference when a property appraises for less than the agreed purchase price.
Define TermFair Market Value
The price a willing buyer and willing seller would agree on, both informed and neither und
Define TermComparative Market Analysis (CMA)
An agent's estimate of a home's value based on recent sales of similar nearby properties.
Define TermContingency
A condition in a purchase contract that must be met for the sale to proceed.
Define