Definition
An appraisal is a valuation of real property in order to determine fair market value, which results in the appraised value.
Analysis
The appraised value of property will depend on a number of internal and external factors. Internally, the appraiser will evaluate the quality of construction, the size of the structure and the acreage of the land, among other factors. Externally, an appraiser will compare the property with similar properties that have sold recently in the area in order to determine the fair market value. That value is reported as the appraised value.
The appraised value is used by mortgage lenders to determine the loan-to-value (LTV) ratio, which can determine lending limits and whether the homeowner must pay private mortgage insurance (PMI). The appraised value may also be used by the buyer to evaluate whether the sale price is higher or lower than fair market value.
Appraisals are required in many situations in which ownership of the property is to be transferred from one party to another. This includes real estate sales, foreclosures, probate and even bankruptcies.
