When Is an Appraisal Ordered? Key Reasons and Scenarios

A property appraisal provides an unbiased, professional opinion of a property’s market value. This valuation process is conducted by a licensed appraiser who considers various factors, including the property’s condition, its location, and recent sales data of comparable properties in the area. Appraisals offer a standardized and objective method for assessing property worth in a wide range of financial and legal situations.

Real Estate Purchase and Sale

When a home purchase involves a mortgage, lenders almost universally require an appraisal. This is because lenders rely on these valuations to confirm that the property’s market value adequately supports the requested loan amount, thereby protecting their investment.

The lender typically initiates the appraisal order, often through an Appraisal Management Company (AMC), to ensure appraiser independence and reduce potential bias. While the lender orders it, the homebuyer usually pays for the appraisal, with costs generally ranging from $300 to $700, and these fees are often included in closing costs. If the appraisal value is lower than the agreed-upon sale price, it can impact the loan amount a lender is willing to provide, potentially requiring the buyer to cover the difference or renegotiate the purchase price.

Sellers sometimes commission a pre-listing appraisal before placing their home on the market. This provides a realistic and unbiased estimate of the property’s value, which can help the seller set an appropriate asking price.

For transactions where a buyer pays cash, an appraisal is generally not a mandatory requirement. However, a cash buyer may still choose to order an appraisal as part of their due diligence. This independent valuation helps the buyer confirm they are paying a fair market price and understand the property’s true worth before finalizing the purchase, providing an added layer of financial protection.

Mortgage Refinancing and Equity Access

When homeowners seek to refinance an existing mortgage, lenders commonly require a new appraisal. This is necessary to establish the property’s current market value, which directly influences the loan-to-value (LTV) ratio for the new loan. A favorable LTV can allow a homeowner to secure a lower interest rate or more advantageous loan terms, as it signals reduced risk to the lender.

Appraisals are also a standard requirement when homeowners apply for a home equity loan or a home equity line of credit (HELOC). These financial products allow homeowners to borrow against the accumulated equity in their property. The appraisal determines the current market value, which is then used to calculate the available equity by subtracting the outstanding mortgage balance.

Knowing the precise equity amount is crucial for lenders to determine the maximum loan amount they can offer for a home equity product. This valuation protects both the lender and the borrower by ensuring the loan is based on a realistic assessment of the property’s ability to serve as collateral. The appraisal provides objective data needed for these types of equity-based financing decisions.

Legal and Financial Planning Contexts

Appraisals play a significant role in estate planning and probate proceedings. When an individual passes away, an appraisal is often ordered to determine the fair market value of real property within the estate. This valuation is necessary for calculating potential estate taxes and for guiding the equitable distribution of assets among heirs.

In probate, an accurate property valuation helps the executor manage and distribute the estate according to legal requirements. It provides a documented basis for the property’s value at the time of death, important for tax reporting to the Internal Revenue Service (IRS).

During divorce proceedings, appraisals are frequently utilized to establish the current market value of marital real estate assets. This objective valuation is essential for achieving an equitable distribution of property between divorcing spouses.

Homeowners may also commission an independent appraisal when appealing their property tax assessment. If a homeowner believes their local municipality has overestimated their property’s value, a professional appraisal can serve as evidence to support a lower assessment.

Government entities also order appraisals in cases of eminent domain. This power allows the government to acquire private property for public use, requiring “just compensation” to the owner. An appraisal is conducted to determine this fair market value, ensuring the compensation offered is equitable for the property being acquired for public projects like roads or infrastructure.

Property Insurance Claims

Appraisals are sometimes ordered in the context of property insurance claims, particularly when there is a significant dispute between a homeowner and their insurer regarding the extent of damage or the cost of repairs. After events like fires, floods, or severe weather, an appraiser, often a specialized property damage appraiser or an independent adjuster, can assess the loss. This assessment helps determine the actual cash value or replacement cost of the damaged property.

If a homeowner disagrees with the insurer’s initial settlement offer, they may invoke an “appraisal clause” found in many insurance policies. This clause allows both the homeowner and the insurer to each appoint their own appraiser. If these two appraisers cannot agree on the loss amount, they then select an umpire, and a decision by any two of the three (two appraisers or one appraiser and the umpire) is binding.