The Appraisal Process & What Appraisers Look For: Part 2- A Guide for New Agents

A Primer for Agents About the Appraisal Process

As a new real estate agent, you’ll quickly realize that the appraisal process can be one of the most crucial—and sometimes confusing—parts of the buying and selling process. Appraisers play an important role in determining a property’s market value, and their value estimates can influence everything from loan approval to the closing price.

In this post, the second in my multi-part series on understanding real estate appraisals, I’ll discuss the appraisal process step by step, breaking down what appraisers look for when determining value. By the end, you’ll have a better understanding of the process and how you can work effectively with appraisers to ensure a smooth transaction for your clients.

Section 1: The Step-by-Step Appraisal Process

1. Order and Initiation
The appraisal process typically begins when the lender orders the appraisal to ensure the property is worth the loan amount they’re offering. While buyers & sellers or agents might request an appraisal for other purposes, such as pre-listing appraisals, the lender is usually the one who coordinates the mortgage appraisal. It’s important to understand that appraisers are independent professionals, meaning they are not influenced by the buyer, seller, or even the agent. Their role is to provide an unbiased appraisal based on the physical characteristics of the subject property as well as the current market conditions.

Appraisers must comply with strict regulations, including the Uniform Standards of Professional Appraisal Practice (USPAP). These guidelines help ensure that the process is fair, transparent, and consistent across all appraisals. As an agent, it’s important to respect the appraiser’s independent role, while also providing them with accurate and complete information about the property.

2. Pre-Appraisal Research and Market Analysis

Before even stepping foot on the property, the appraiser starts by collecting data to help them in the appraisal process. They will look through public records, MLS data, and recent sales in the area to get an idea of current market activity. This pre-appraisal research helps appraisers understand the market conditions and identify potential comparable sales, as well as active listings and pending sales. By looking at closed, active, and pending sales, the appraiser can get a more well-rounded picture of what the market is like for the subject property.

The local market conditions—whether it’s a seller’s or buyer’s market—also have a significant impact on the appraisal. An appraiser will reconcile their final value within the range of values provided by the comparables. If inventory is low and demand is high, like we saw right after COVID, the appraiser may reconcile at the top end. If there is more inventory with less demand, then they may reconcile towards the lower part of the range. The increase in interest rates over the last several years has cooled the market, which may reflect value in the middle to lower part of the range. Of course, every market is different, and even within different price ranges, so we cannot make a blanket statement about all markets. As a new agent, understanding these market dynamics will help you anticipate how they might affect the final appraisal.

3. On-Site Inspection
The appraiser will then visit the property to perform an on-site inspection, which is where they’ll physically evaluate the home. They’ll observe key elements like the property’s size, condition, and layout. Appraisers typically look at the square footage, the number of bedrooms and bathrooms, and the overall condition of the property, including the roof, foundation, plumbing, and electrical systems. We’ll normally only consider what is readily observable, unlike a home inspection, which goes into much more detail.

Appraisers also take note of any upgrades or renovations, such as new appliances, remodeled kitchens, or added rooms. These improvements can influence the appraisal value—either positively or negatively. For example, a well-maintained home with a modern kitchen will likely appraise higher than one in need of significant repairs.

As an agent, you can help ensure that the appraiser has accurate information about the property. Double-check things like significant features and any updates or renovations that have been made. This helps avoid discrepancies between the MLS listing and what the appraiser sees, which could affect the final opinion of value.

4. Valuation and Final Report
After completing the on-site inspection, the appraiser will compare the property to similar homes in the area (comps) and apply adjustments as necessary. This process helps them determine an adjusted market value range based on comparable properties.

In addition to the sale comparison approach, the appraiser may also use other methods, like the Cost Approach (what it would cost to rebuild the property) or the Income Approach (used for income-producing properties like rental homes). But for most residential appraisals, the Sales Comparison Approach is the primary method.

The final report will include the appraiser’s opinion of the property’s market value, as well as a detailed description of what they considered when arriving at that conclusion. Appraisers must follow strict guidelines during the entire process to make sure the appraisal is unbiased and based on current market data.

Section 2: Key Factors Appraisers Evaluate

1. Property Characteristics
When appraising a home, appraisers consider several property characteristics:

• Square footage: Larger homes typically appraise for more when everything else is equal, but there are other factors as well.
• Lot size: A larger lot can add more or less value, depending on if the extra land is considered excess land or surplus land.
• Number of bedrooms and bathrooms: More living space generally means a higher value, though this depends on the quality of the space.
• Layout and functionality: Appraisers will also determine whether the layout and functionality of the home is practical and usable for a typical buyer. Open floor plans may have more appeal than cramped layouts.

Additionally, the structure of the house is important. A home that’s well-maintained and has a strong foundation will typically appraise higher than one with settlement problems.

2. Location and Neighborhood Influences

The location of a property is typically one of the most important factors in the appraisal process. Appraisers will consider the home’s proximity to important amenities like schools, shopping centers, and public transportation. Homes in desirable locations typically appraise higher because there is more demand for them.

They also look at neighborhood trends—for instance, whether the neighborhood is in the middle of a revitalization or whether it has declining values due to external factors like economic downturns. These factors are typically reflected in the local comps that are chosen if they are in the same competitive market area.

3. Comparable Sales (Comps)

Appraisers use comparable sales (comps) to determine a property’s value. Comps should be similar in terms of size, condition, and location. The closer the sale date is to the appraisal date, the more relevant the comp is. However, the appraiser will need to adjust the price of the comps based on any differences—such as a bigger lot size, more square footage, or additional features like a pool.

If the property is in an area where comps are difficult to find, the appraiser may have to expand on their search criteria to other similar areas. These other areas are referred to as a competitive market area. This area is one that a potential buyer would look if no houses were available in the subject neighborhood. They are similar in school system, price range of homes, as well as quality and size range of homes.

4. Market Conditions

Appraisers also take into account market conditions at the time of the appraisal. Is it a seller’s market where demand exceeds supply? Or is it a buyer’s market where there’s an oversupply of homes? These conditions can affect the final appraisal value, as homes in high-demand areas usually sell for more.

Other economic factors like interest rates and buyer activity can influence what comparable properties sell for and, in turn, what the subject property might be worth. Appraisers will consider all these factors when arriving at a final opinion of value.

5. Home Improvements and Upgrades

When it comes to home improvements and upgrades, appraisers measure whether the changes add real value. For instance, a new kitchen or updated bathrooms are likely to add significant value. On the other hand, cosmetic changes like paint or minor landscaping changes might improve the home’s appeal but may not significantly impact the appraised value.

One thing to keep in mind is over-improvements—investing too much in renovations that aren’t typical for the neighborhood’s price range could result in an appraisal that doesn’t reflect the money spent.

Section 3: Common Misconceptions About Appraisals

As a new agent, you’ll hear a lot of misconceptions about appraisals. Here are a few common ones to clear up:

• Appraisers set property values: Appraisers don’t set the value—they interpret market data, comps, and property details to provide an opinion of value.
• Improvements guarantee a dollar-for-dollar increase in a home’s value: Not all improvements result in a direct increase in value. For instance, high-end finishes in a lower-priced neighborhood may not yield a significant return.
• Agents or sellers can influence the appraisal process: Appraisers are required to be independent and impartial. While you can provide them with accurate information, trying to influence their judgment is not a good idea. Just remember, it’s okay to talk about most things except value.

Conclusion

Understanding the appraisal process is key to successfully navigating real estate transactions. As a new agent, you can help your clients by explaining how appraisers determine value, what factors they consider, and how market conditions can influence the final appraisal value. By staying informed, you’ll be able to guide your clients through the process with confidence.

In the next installment of this series, I’ll discuss specific questions that your buyers or sellers may have, and I’ll provide answers that you can pass along to them so that you can be their trusted source of information.

If you have any questions, feel free to contact me, and as always, thanks for reading.

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