An appraisal is the process of determining what something is worth, getting an official value on a big ticket item — whether that item is your engagement ring, your late grandfather’s Black Forest cuckoo clock, or your beloved home.

Insurance companies use appraisals to value items in your home, such as your engagement ring, so they can provide adequate coverage. Charitable contributions of property over $5,000 require a qualified appraisal for tax deduction purposes. You may also hear the term performance appraisal, which evaluates an employee’s accomplishments and may be used to justify a promotion, raise, or disciplinary action.

But if you’re buying or selling a home, you’re interested in a real estate appraisal. To provide you with the best definition of a home appraisal, who performs a home appraisal, and how it must be done, we spoke with top Florida real estate agent Joe LoCicero, who sells more than 22% faster than average agents in his area, and Diana Benson, owner and operator of Benson Appraisals in Gilbert, Arizona.

Appraisal definition

General definition from Merriam-Webster

Appraisal (noun): an act or instance of appraising something or someone

Especially: a valuation of property by the estimate of an authorized person.

Appraisal definition from Investopedia

Appraisal (noun): An appraisal is a valuation of property, such as real estate, a business, collectible, or an antique, by the estimate of an authorized person. 

Home appraisal definition from Appraisal Institute

Appraisal (verb): an appraisal is the act or process of developing an opinion of value.

A home appraisal is both a process and a report

Many homeowners assume an appraisal is the report or form that states what the home is worth, as you can see from the definitions above, an appraisal is also the process of evaluation.

Appraisal as the act of evaluating a property (verb): the process a licensed professional appraiser uses to determine the value of real estate property. The appraisal process includes:

• Visual evaluation of home size, age, condition, and features
• Comparison against similar homes in the area
• Numerical calculations of value

Appraisal as a report of property value (noun): the physical or digital paperwork that states the appraised value of the home and how the appraiser determined the value, usually provided through the Uniform Appraisal Report. The appraisal report includes:

• The appraisal form
• Photographs of the front, back and street scene of the home
• Sketch of the exterior building
• Explanation of how square footage was calculated
• Street map showing the location of the appraised property in relation to properties used in the comparison (comps)
• Photographs of the comparable properties
• MLS listings of the comparable properties
• Any additional information the appraiser used in the appraisal process, including market sales data, public land records, or tax records

Requirements of a home appraisal

According to the Uniform Standards of Professional Appraisal Practice (USPAP), an appraisal must involve the following:

Impartial appraisal

An appraisal is performed by an impartial third-party. An impartial appraiser doesn’t have a buying or selling interest in the home, isn’t a family member, friend or colleague of any interested parties.

Qualified appraisal

An appraisal must be performed by a qualified appraiser. The definition of a qualified appraiser varies by state and lender requirements. Depending on the location and mortgage company, a qualified appraiser may hold either an associate or bachelor’s degree, have 12-18 months of experience working with an appraiser, and have an appraiser certificate or license.

Numerical expression of value

USPAP states that an appraisal must have a numerical expression of value that is expressed as a specific amount, a range of numbers, or as a relationship (not more than or not less than) to a previous numerical benchmark.

Why you might need a home appraisal

If you’re curious about the value of your home, says LoCicero, you can get an approximate value on your home. There are many online tools, apps and websites, such as HomeLight’s home valuation estimator, that can provide an approximate value based on local listings and a calculation. To be clear, an online valuation is not an appraisal. The only way to get an accurate valuation on your home is to hire a licensed professional appraiser.

Appraisal for a lender-financed home sale

When you sell your property to a buyer who is financing the purchase with a mortgage, the lender requires an appraisal to ensure the value of the property is equal to or greater than the amount being borrowed. The buyer pays for the appraisal that the lender orders. The seller will generally not see the lender’s appraisal unless the home appraises below the purchase price.

An appraisal protects the buyer from owing more than a home is worth, which is called negative equity but is also referred to as underwater or upside down in a mortgage. An appraisal also protects the lender from investing more than a home is worth in the event the buyer defaults on the mortgage. When an appraisal value of a home is less than the asking or purchase price, it’s considered a low appraisal.

Example 1: April and Andy have listed their home for $350,000. They receive an offer for their asking price. The buyer is financing through a mortgage company. The appraisal values the property at $355,000 and the sale closes successfully.

Example 2: Cameron and Mitchell have listed their home for $275,000 in a hot seller’s market. They receive multiple bids and enter into a purchase agreement with the highest bid, which is $350,000. The buyer is financing with a mortgage.The appraisal values the property at $300,000 and the sale falls through. (Note: The sale might have been saved if the seller had hired a top real estate agent who recommended an appraisal gap guarantee or contested the appraisal with a reconsideration of value).

Appraisal for refinance

Homeowners who refinance to pay off their home sooner, or to reduce interest rates or mortgage payments, replace their current mortgage with a new one. You might also refinance if you need to dip into your home equity (the difference between what you owe and what your home is worth). There are many ways you might use your home equity, such as paying for updates or improvements to your home, paying your child’s college tuition, or paying off high-interest debt.

When you refinance, your lender will require an appraisal. Note that if you’re cashing out your equity, your lender will cap how much you can use, and generally won’t allow you to borrow more than 80% to 90% of the home’s value.

Example: George and Emma decided to cash out their equity to remodel their kitchen while interest rates were low. They owed $185,000 and were paying 4.72% interest. The appraised value of their home was $350,000. They cashed out $50,000 of the equity, refinancing at $235,000 and lowered their interest rate to 2.9% interest.

Appraisal to determine or justify asking price

If you’re selling your home yourself and you don’t know how to price it, an appraisal can steer you in the right direction and support your asking price.

Most top real estate agents know the local market well enough to recommend a listing price. However, if your home is unique or unusual to your neighborhood, a real estate agent may recommend an appraisal to justify an asking price that is higher than most homes in your area. The agent can then upload the appraisal report with the MLS listing to support the asking price, says LoCicero.

Example: Jack and Fiona converted a barn into a beautiful home with an open floor plan. When they planned to sell their home, an experienced real estate agent recommended they seek out an independent appraisal. They listed their home at the appraised value of $450,000 which was $150,000 higher than homes of similar size in their area. Their agent included the appraisal with the listing.

Appraisal to assist with financial planning

A financial planner may recommend a home appraisal if you’re planning your retirement or your estate. If you’re planning your retirement, an appraisal will help you determine how much you could save if you sold your home and downsized. If you’re writing a will, an appraisal will help you determine how much your beneficiary might pay in estate taxes or whether your executor will need to sell your home to pay off your debt.

Example: Empty nesters Elizabeth and William had their 5-bedroom family home appraised prior to retirement. They could easily pay off the $75,000 they had left on their mortgage, but their retirement income wouldn’t pay for the retirement lifestyle they wanted. When their home appraised for $500,000, they decided to sell it, purchase a smaller home that they would own free-and-clear, and put the remaining equity into their retirement fund.

Other reasons for a home appraisal

• Appealing a property tax assessment The assessed market value of your home is multiplied by the tax rate to determine how much you’ll pay in property taxes. If the assessed value of your home is higher than the appraised value, you can have your home appraised to dispute the assessed value.

• When one homeowner buys out the other In the event of a breakup or divorce, one homeowner may buy the other out of the mortgage. An appraisal will determine the value of the home, which will reveal how much equity is in the home. The mortgage must be refinanced in order to remove one of the homeowners off the loan. The homeowner who wishes to keep the home typically pays an agreed upon portion of the equity to the homeowner who is moving out, which may be done with a cash-out refinance.

• Appraisal for litigation In the unfortunate event that you declare bankruptcy or you are sued, you may be legally required to declare all your assets, including the value of your home. A home appraisal will determine the value of your home.

• Appraisal for probate In the event that a family member dies and you’re the executor of their estate, you will typically be required to have the property appraised. The value of the home determines whether tax is owed for the property (and how much), if the property must be sold to pay off the decedent’s debt, and/or the amount of value to be split between beneficiaries.

Why you shouldn’t rely on old property values

As the real estate market fluctuates, the value of your home also fluctuates.  For this reason, an appraisal expires after 90 days. If you need to value your home for any reason, don’t rely on an old appraisal. Hire a qualified appraiser who can  provide a detailed appraisal report that includes the numerical expression of value.