Appraisal
An appraisal is a licensed appraiser's opinion of what a property is worth. The lender orders it, the borrower usually pays for it, and its purpose is to confirm that the collateral supports the loan.
How residential value is established#
Almost always by the sales comparison approach: recent sales of similar properties nearby, adjusted for differences in size, condition, age, lot and features.
That method has a structural consequence. An appraisal is a backward-looking measurement. It reports what similar properties sold for, which in a fast-moving market means it lags — upward in a rising market, downward in a falling one.
Appraisals coming in below contract price during rapid appreciation is not usually an appraiser being wrong. It is the method working as designed on data that is a few months old.
When it comes in low#
The lender lends against the appraised value. The contract price becomes irrelevant to the loan amount.
Four possible outcomes: the buyer brings the difference in cash, the parties renegotiate the price, the appraisal is successfully challenged, or the transaction ends.
Which of those is available depends on the contract. An appraisal contingency lets the buyer walk or renegotiate; without one, the buyer may be committed to a purchase they can no longer finance at the agreed price.
Challenging one#
Reconsideration requests succeed occasionally, and only on evidence.
That means specific comparable sales the appraiser did not use, with an explanation of why they are more comparable — closer, more similar, more recent. An objection that amounts to disagreement with the number will be dismissed.
Not an inspection#
An appraiser looks at condition insofar as it affects value. An inspector looks for defects.
A buyer who skips an inspection because the appraisal came back fine has confused a valuation with a condition assessment, and the two are not substitutes. This mistake is expensive and common.
Where it interacts with distressed property#
Distressed sales complicate appraisal in two directions.
A property in poor condition may not appraise at all for conventional financing, because minimum condition standards are not met — which is what rehabilitation loan products exist to solve.
And in neighbourhoods with a high share of foreclosure and forced sales, those transactions enter the comparable set. That drags appraised values down for every owner nearby, including ones who are current on their mortgage and maintaining their home.
Distress, in other words, is contagious through the valuation mechanism itself.