Appraisal 101

Appraisal FAQ

How is an appraisal different than a home inspection?

Home inspectors conduct most of their work on-site, making detailed inspections of the property's electrical, plumbing, HVAC, and structural systems to determine the condition of the home’s primary systems. Appraisers, on the other hand, do most of their work at their desks. Their primary objective is to determine value; they measure the home and conduct a cursory inspection of the interior and exterior. While an appraiser notes the home’s condition and considers it in their value opinion, they rely on other experts, such as home inspectors, for detailed information about the home’s systems.

How is an appraisal different from a comparative market analysis (CMA)?

Most real estate agents are not appraisers, so they cannot legally perform appraisals. However, they are allowed to perform CMAs in the normal course of business, such as when listing a home for sale. CMAs are not bound by the same strict rules as appraisals, which require non-biased analysis, supported adjustments, and a market value definition centered on the "most probable price." Appraisals are performed by licensed appraisers who have undergone extensive training and experience, making them generally more detailed and accurate than CMAs.

Who are an appraiser’s customers/clients?

An appraiser's client is generally the person who hires them. This gets a bit complicated with lender assignments, where the lender is technically the client. In those situations, the appraiser cannot discuss the value or provide the report directly to the borrower, even though the borrower likely paid for it. Fortunately, it is standard practice for the lender to give the borrower a copy of the appraisal, after which the appraiser is better able to talk about it. Even when the appraisal is not for lending purposes, the appraiser typically will not discuss the value with any party until the assignment is completed. This safety precaution ensures all proper research and analysis are finished before an opinion of value is presented.

What data sources do appraisers use?

Appraisers rely on a mix of public and private data sources to gather information on plat maps, property details (such as year built and legal descriptions), and flood zone status. The Multiple Listing Service (MLS) is especially helpful for finding comparable properties (comps), as it typically includes detailed property information and numerous photos. Appraisers also rely on cost manuals for cost estimates, alongside the data gathered during their field inspections of both the subject property and the comps.

Which home renovations add the most value?

Kitchens and bathrooms are typically the most valuable areas of a home, so updating these spaces generally adds the most value. However, the best "bang for your buck" usually comes from simpler cosmetic updates like new carpet and fresh paint. Because most improvements do not bring a full return on investment, we can help you with more specific information tailored to your unique situation.

Why is the appraised value often similar to the sale price?

For purchase transactions, the appraised value is often near the sale price because most buyers pay a fair and reasonable price. Most transactions involve real estate agents, buyers, and sellers interacting in the open market. The fact that buyers typically see several properties before purchasing generally leads to a reasonable agreed-upon price.

Exceptions usually occur when standard market dynamics are missing, such as when a buyer or seller is highly motivated or when the parties are related. When a home is appraised for a purchase transaction, the subject property is considered its own best comp. Because no available comp is better than the property itself, the current transaction is given significant weight in the final analysis and opinion of value.

What is a real estate appraisal?

Technically speaking, an appraisal is the formal process of developing an expert opinion of a property's value. However, when people say "appraisal," they are usually referring to the appraisal report—the official document that spells out the final number and how the appraiser got there.

What is an appraisal report?

Think of it as a comprehensive biography of a property. An appraisal report details the specific home, its surrounding neighborhood, the current market conditions, and its "highest and best use." It also includes one or more mathematical approaches to value, a final reconciliation, and the ultimate value opinion.

What is an approach to value?

Appraisers don't just pull numbers out of a hat; they use structured methodologies. The three most common strategies are the sales comparison approach, the cost approach, and the income approach.

What is the sales comparison approach?

This is the absolute gold standard for residential real estate. It features a side-by-side grid or spreadsheet with your home (the "subject") in the far-left column, and recently sold properties ("comps") in the columns to the right, complete with dollar-value adjustments to level the playing field.

What is a comp?

Short for "comparable property," a comp is a recently sold home that matches the subject property as closely as possible in location, size, condition, and features. Because finding a perfect clone of your home is nearly impossible, appraisers look for comps that bracket the home's most important features.

What is bracketing?

Bracketing ensures an appraisal stays perfectly balanced. It means using some comps that are slightly superior to your home and others that are slightly inferior for any given feature. For example, if your home sits on a 2-acre lot, the appraiser will ideally use some comps with 1.5 acres and others with 2.5 acres to ensure the final data isn't skewed.

What is skewing?

Skewing happens when the final value is artificially pushed too high or too low because of unbalanced data. It’s the direct result of poor bracketing—like comparing a modest home only to mansions, or only to fixer-uppers.

What are adjustments?

If your home has a 1,000-square-foot layout and a great comp has 1,200 square feet, the appraiser will apply a calculated dollar adjustment to the comp's sales price to make it a fair comparison. Adjustments can be positive or negative, depending on whether the comp has more or less to offer than your home.

How do you know how much to adjust?

Appraisers rely on data, not guesswork. The two most common techniques are paired sales analysis (the traditional gold standard) and regression analysis (the modern statistical favorite).

Want to nerd out on math? Check out our dedicated blog post on this website for an in-depth look at how adjustments are calculated!

What is regression analysis?

In layman's terms, regression analysis uses mathematical algorithms to look at massive amounts of market data and calculate exactly how much specific features—like a swimming pool, a third garage stall, or a larger lot—add to a property's value.

What is paired sales analysis?

In a perfect world, paired sales analysis compares two homes that are identical in every single way, except for one feature. If Home A and Home B are identical clones, but Home B has a fireplace and sells for $2,000 more, the fireplace is worth $2,000. Because identical clone houses are hard to come by, appraisers typically use a modified, real-world version of this method.

What is the cost approach?

This method calculates what it would mathematically cost to rebuild your home from scratch today, adds the value of the raw land and site improvements, and then subtracts any depreciation or obsolescence.

What is depreciation/obsolescence?

This is the fancy term for lost value, and it comes in three distinct flavors: physical, functional, and external.

Physical Depreciation: Standard wear and tear. Think aging roofs, worn carpets, or fading paint.
Functional Obsolescence: Flaws inside the property line, usually due to poor or outdated design. (For example: having to walk through one bedroom just to get into another bedroom).
External Obsolescence: Flaws outside the property line that you can't control—like sharing a backyard fence with a noisy railroad track or an industrial factory.

What is the income approach?

This approach is used for income-generating properties like rental homes or duplexes. Appraisers use a Gross Rent Multiplier (GRM), which is calculated by dividing a comp's sales price by its gross rental income. Multiplying the subject property's expected rent by this market-derived GRM gives you its estimated value.

In an appraisal, what is a "neighborhood"?

While you might think of your neighborhood as just the houses on your street, an appraiser looks at two levels. The immediate neighborhood is the closest vicinity (where we try to find all our comps). If there aren't enough recent sales there, we expand to the general neighborhood—a larger, broader area where reasonably similar properties can be found.

What is a market?

Properties don't exist in a vacuum; they belong to a specific market segment based on what local buyers are actively looking for. A property's price, size, location, and style determine exactly which segment of the market it competes in.

What is the highest and best use?

This is the legal, physically possible, and financially feasible use of a property that yields the highest financial return. For example, if you own a home on a massive piece of land, the "highest and best use" might actually be splitting the lot to build a second home—provided local zoning laws allow it.

What is reconciliation?

This is where the appraiser acts as the judge and jury of the data. During reconciliation, the appraiser reviews all the comps and approaches used, weighs which data points are the most reliable and relevant, and uses them to form the final, official value opinion.

What is market value?

While there are a few technical definitions, market value ultimately means the most probable price a property should bring in a competitive, open market. It assumes both the buyer and seller are acting prudently, are reasonably motivated, and aren't under any unfair pressure or duress to close the deal.

Have more questions or need a professional appraisal for your property? Please give us a call today!

Serving Salt Lake, Utah, & Davis Counties

801-651-6575

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