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Real Estate & Housing

Property Appraisals: How Value Is Determined

How a professional appraiser arrives at a home's value, and why that number can matter as much as the agreed sale price.

A property appraisal is a professional, independent estimate of a home’s market value, conducted by a licensed appraiser. It’s a distinct step from the sale price a buyer and seller agree to - and when a mortgage is involved, the lender typically requires an appraisal before approving the loan, because the home itself is the collateral backing it.

How appraisers actually arrive at a number

Appraisers primarily rely on comparable sales - recent sale prices of similar homes nearby, adjusted for differences in size, condition and features - combined with a physical inspection of the property’s condition, age, and any upgrades or needed repairs. This mirrors how mortgages work, covered elsewhere in this module: the appraisal directly determines how much a lender is willing to finance.

When the appraisal and the sale price disagree

A buyer and seller agree on a $400,000 sale price, but the appraisal comes back at $370,000. This **appraisal gap** creates a real problem: the lender will typically only finance based on the lower appraised value, leaving the buyer to cover the $30,000 difference in cash, renegotiate the price with the seller, or walk away, depending on what the purchase contract allows.

Why this matters beyond just buying a home

Appraisals also affect refinancing, since a lender needs to confirm the home’s current value before approving new loan terms, and they affect property tax assessments in some jurisdictions, which use similar valuation principles to determine a home’s assessed value for tax purposes.

Assuming a high sale price guarantees a matching appraisal

In competitive markets, buyers sometimes offer well above asking price to win a bidding war, without accounting for the real possibility the home won't appraise for that amount. Reviewing recent comparable sales before bidding significantly above asking price, and understanding what happens contractually if the appraisal comes in low, avoids an unpleasant surprise later in the process.

Key takeaways
  • An appraisal is an independent, professional estimate of a home's market value, distinct from the agreed sale price.
  • Appraisers rely primarily on comparable recent sales, adjusted for differences, plus a physical inspection.
  • An appraisal gap can leave a buyer needing extra cash, a renegotiated price, or the option to walk away.
  • Appraisals also matter for refinancing and, in some places, property tax assessments.
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