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The act of estimating the value of a property by a person licensed to do so. A person performing an appraisal must receive authorization from the appropriate body of the state in which he/she resides. An appraisal may take into account the quality of the property, values of surrounding properties, and market conditions in the area. It is important for determining the property taxes for which the owner is liable, as well as a potential sale price if the owner wishes to sell his/her property.




The process of developing an opinion about a property's value. That opinion is supposed to reflect what a willing buyer would pay a willing seller after reasonable exposure to the marketplace,with neither buyer nor seller operating under any sort of duress or pressure.An appraisal is generally required when property is financed,and should be required before a real estate agent attempts to market anything significantly different from properties commonly and frequently sold in the marketplace.It may not be necessary to obtain an appraisal of a four-bedroom ranch house in a good school zone, but some assistance may be needed in arriving at a price to market an 11,000 square foot ski-lodge-type home in a small town.

• There are three common approaches to estimating the fair market value of a property. They are comparison, cost, and income.

• The comparison approach to appraisal seeks to obtain information about recent sales of comparable properties. It would be highly unlikely for the properties to be identical, so the appraiser will make adjustments in the sale price of the other comparable properties— called comps for short—in order to calculate what the sale price might have been if it were identical to the subject property. For example, if the subject property had no garage, but the comp had a two-car garage, the appraiser might subtract $50,000 from the sale price of the comp. The appraiser might then add $30,000 because the subject property has a finished attic providing more livable square footage, and another $15,000 because the subject property is brick while the comp is wood frame needing new paint. A residential appraiser will typically use three comps, commercial appraisers will employ more because it's generally difficult to find truly comparable properties, resulting in a large number of adjustments. The more adjustments, the more likely error will creep into the calculations. At the end of the process, the appraiser will have a value based on the comparison approach.

• Cost approach. This approach uses an estimate of the reproduction or replacement cost of the improvements, less depreciation, plus land value. The reproduction cost is the amount necessary to build exactly the same building. Replacement costs are those necessary to build an improvement with substantially the same usefulness using today's materials and techniques, but not necessarily the same exact characteristics.

• Income approach. This approach assumes that the value of the real estate is directly related to the value of the income generated by that real estate, such as shopping centers, apartments, and office buildings. The appraiser will calculate a net operating income (NOI) for the property by taking all possible income over the course of a year, and then subtracting operating expenses, insurance, real estate taxes, reserves for bad debts, a certain percentage for anticipated vacancies, and sometimes a certain dollar amount for the value of the owner's management and supervision. The bottom line number, the NOI, is then capitalized by dividing it by a certain percentage. That percentage rate is supposed to reflect the return an investor would expect on his or her money taking into consideration all the variables associated with the property. Variables could include the strength of the tenants, the likelihood of default, the remaining term on the leases, the prospect of future rent increases built into the leases, the likelihood of lease renewals at the expiration of current terms, the cost of financing to purchase the property, the availability of  other investment sources and their rates of return, and other such factors. If a property had an NOI of $100,000 and a capitalization rate (cap rate for short) of 10 percent, then you divide $100,000 by 0.1 and arrive at a value of $1,000,000. Increasing the cap rate to 11 percent decreases the value to $909,090. Decreasing the cap rate to 9 percent increases the value to $1,111,111.

• Integration. Sometimes the appraiser will have to employ several methods in order to account for different aspects of the property. An income-producing property might include additional acreage for future development. The appraiser would value the current improvements using the income approach, and the surplus or excess land using the comparable approach.

• Reconciliation. At the end of the analysis, the appraiser will take all methods employed, as appropriate to the property, and reconcile the differing values into one value. This will then be the appraised value of the property.


A written estimate of a property's current market value pre- pared by an appraiser.

References in periodicals archive ?
The Appraisal Institute has said that the lower fees paid by many appraisal management companies has led to appraisals being done by the least qualified and least competent appraisers.
2002 David Rothermich, MAI, "Partitioning Real Property," The Appraisal Journal (July 2002): 283-290.
For banks with a history of questionable real estate loans, the regulatory agencies could require that the banks hire an appraisal reviewer as a condition for federal insurance "As a practical matter, any of the surviving S&Ls are going to have to have an in-house review.
Responses to questions about the effectiveness of the "process" of performance appraisal each physician experienced during 1989 revealed that, overall, only 71 percent received a written appraisal.
During the course of its consideration of its real estate appraisal regulation, the Federal Reserve Board remained sensitive to the need for minimizing potential costs and burdens that the regulation could impose while, at the same time, not jeopardizing safety and soundness considerations and the purposes of Title XI.
Step 6: The executive reviews the information contained in the reverse appraisal forms and factors that information into the supervisor's performance appraisal and performance improvement plan.
Otherwise, formal performance appraisal systems only create more problems than they solve.
New Feature Enables Secure Payment of Real Estate Appraisals by Borrowers
Rockville, Maryland-based Coester Appraisal Group, a nationwide appraisal management company, has launched a repurchase guarantee that protects its clients against appraisal-based buybacks.
For all appraisals with an effective date of on or after September 1, 2011, in conjunction with the Uniform Appraisal Dataset (UAD) deadline set by the GSEs, Coester requires that appraisers provide their assessments in the UAD-compliant format for applicable appraisal forms for all conventional, Federal Housing Administration (FHA), and United States Department of Agriculture (USDA) Loans.
Lesson 8: Top management must support and demonstrate effective appraisal practices.
For charitable contributions, a completed appraisal summary (section B of Form 8283, "Noncash Charitable Contributions").