A real estate appraisal helps to establish a property's market value.

Your lender will require an appraisal when you ask to use a home or other real estate as security for a loan, because it wants to make sure that the property will sell for at least the amount of money it is lending.

Don't confuse a comparative market analysis, or CMA, with an appraisal. Real estate agents use CMAs to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price with their CMAS, but an appraiser's report is much more detailed--and is the only valuation report a bank will consider when deciding whether or not to lend the money.

About Appraisers and Appraisals

• Appraisers are licensed by individual states after completing coursework and internship hours that familiarize them with their real estate markets.
• The lender might use an appraiser on its staff, or contract with an independent appraiser.
• The property being appraised is called the subject property.
• You will probably pay for the appraisal when you apply for your loan, sometimes it will be added in to your closing costs.

What You'll See on a Residential Appraisal Report

• Details about the subject property, along with side-by-side comparisons of three similar properties.
• An evaluation of the overall real estate market in the area.
• Statements about issues the appraiser feels are harmful to the property's value, such as poor access to the property.
• Notations about seriously flawed characteristics, such as a crumbling foundation.
• An estimate of the average sales time for the property.
• What type of area the home is in (a development, stand alone acreage, etc.).

Residential Appraisal Methods

(1) Sales Comparison Approach

The appraiser estimates a subject property's market value by comparing it to similar properties that have sold in the area. The properties used are called comparables, orcomps.

No two properties are exactly alike, so the appraiser must compare the comps to the subject property, making adjustments to the comps in order to make their features more in-line with the subject property's. The result is a figure that shows what each comp would have sold for if it had the same components as the subject.

(2) Cost Approach

The cost approach is better used for new properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed.

So What Does the Appraisal Mean to You?

Your personal approval is accomplished early in the loan process, but final loan commitment usually hinges on a satisfactory appraisal. The bank wants to be sure its investment is covered in case you default on the loan.

If the property appraises lower than the sales price, the loan might be declined, but that isn't the only hurdle it must pass. Other facts on the appraisal can be a problem, too:

• The bank probably won't like it if the estimated time to sell the property is longer than the area average.
• If the appraiser notes that entry to the property is from a private, shared road the bank might want to see a road maintenance agreement signed by everyone who uses the road, verifying that maintenance is shared by all parties.

Those are just a few examples of negatives that could stall your purchase. The lender will study the appraisal carefully before determining whether or not the property qualifies to serve as security for your loan.

An Appraisal Isn't a Home Inspection!

Appraisers make notations about obvious problems they see, but they are not home inspectors. They do not test appliances, look at the roof, check the chimney or do any other typical home inspection tasks. Never count on an appraisal to help you determine if the home is in good condition.

Information obtained at About.com: Home Buying/Selling