When Does an Appraisal Happen? Common Reasons & Scenarios

An appraisal is a professional, objective estimate of an asset’s value. This valuation is conducted by a licensed or certified appraiser. The general purpose of an appraisal is to provide an unbiased assessment of value, crucial for various financial and legal scenarios. Appraisals offer a formal evaluation by an expert, ensuring the estimated value is based on data rather than assumptions or emotional factors.

Appraisals in Real Estate Transactions

Appraisals are frequently encountered in real estate transactions, serving as an important component for both buyers and lenders. When a property is being bought or sold, an appraisal determines if the sale price aligns with the property’s market value. Lenders require this independent assessment to ensure the loan amount does not exceed the home’s actual worth, as the property itself serves as collateral for the mortgage.

Refinancing a mortgage also necessitates an updated appraisal to assess the property’s current equity. Lenders use this information to evaluate the risk associated with the new loan terms and to confirm the property adequately secures the refinanced amount. The appraisal helps determine if the homeowner has sufficient equity to qualify for the desired loan. Appraisals are also used when homeowners challenge their property tax assessments. An independent appraisal provides objective evidence to support an appeal, arguing that the assessed value is higher than the property’s fair market value.

Appraisals for Legal and Estate Planning

Appraisals are important in legal and estate planning, often mandated by law or court proceedings. In divorce settlements, appraisals are used to value shared assets, such as real estate, personal property, or even business interests, to ensure an equitable division. This objective valuation helps facilitate negotiations and provides a factual basis for asset distribution. Appraisals also play a role in estate planning and probate, determining asset values for inheritance, estate taxes, and distribution among heirs.

When making charitable donations of non-cash assets, appraisals are often required to determine the deductible amount for tax purposes. If a non-cash contribution is valued at $5,000 or more, a qualified appraisal must be obtained and an appraisal summary (IRS Form 8283) attached to the donor’s tax return. In eminent domain proceedings, where a government entity acquires private property for public use, appraisals are used to determine the fair compensation owed to the property owner. The government typically obtains an appraisal to establish the property’s fair market value, and property owners also have the right to obtain their own independent appraisal to challenge the government’s valuation.

Appraisals for Insurance and Loan Collateral

Appraisals are also performed for insurance purposes and when non-real estate assets are used as loan collateral. For insurance claims, appraisals assess the value of damaged property, such as vehicles, artwork, or collectibles, to determine appropriate payouts. They can also establish the initial insurable value of unique or high-value items.

Beyond real estate, appraisals are necessary when various other assets are pledged as collateral to secure a loan. This can include fine art, jewelry, specialized equipment, or even intellectual property. Lenders require these appraisals to determine the asset’s current market value, ensuring that the loan amount is adequately secured by the collateral. The appraisal helps lenders assess risk and establish appropriate loan-to-value ratios, protecting their investment in case of borrower default.

Appraisals for Business Valuation

A distinct type of appraisal focuses on valuing an entire business or a significant ownership interest. When a business is sold or acquired, a comprehensive business appraisal determines its fair market value, guiding the sale price and negotiation. This valuation considers all tangible and intangible assets, liabilities, and future earning potential. Similarly, during mergers and acquisitions, business appraisals are conducted to ascertain the value of the companies involved, informing the terms of the transaction.

Business appraisals are also important in resolving internal ownership matters, such as partnership disputes or shareholder buyouts. They establish the value of an owner’s stake, facilitating fair buy-sell agreements or dispute resolution. Certain accounting standards and regulatory requirements necessitate periodic business valuations for financial reporting and compliance purposes. These valuations provide a snapshot of the company’s worth, supporting transparency and financial accuracy.