Why Do Appraisals Come In at the Sales Price?

Home appraisals are a standard part of most real estate transactions, particularly when a mortgage is involved. Many people observe that the final appraised value of a property often aligns closely with the agreed-upon sales price. This alignment is not coincidental; it stems from the fundamental nature of appraisals, the significance of the sales contract, the methodology appraisers employ, and the practical requirements of mortgage lenders.

Understanding the Appraisal’s Role

A home appraisal provides an independent estimate of a property’s market value, conducted by a licensed, unbiased appraiser primarily for mortgage lenders. This valuation ensures the loan amount aligns with the property’s actual worth. The appraisal process involves a thorough inspection of the property’s interior and exterior, evaluating its condition, size, and features. This differs significantly from a home inspection, which focuses on the property’s physical condition and potential defects rather than its monetary value.

The Sales Contract as a Value Indicator

The sales price in a purchase contract represents a negotiated agreement between a willing buyer and seller. This agreed-upon price indicates what the market values the property at. Appraisers receive a copy of this sales contract and consider it a starting point for their valuation analysis. While the appraiser’s role is to provide an objective value, the contract price reflects recent market dynamics and specific property attributes that two parties have mutually agreed upon.

The Importance of Comparable Sales

Appraisers use the “sales comparison approach” to determine a property’s value. This method involves analyzing recently sold properties, known as “comparable sales” or “comps,” that share similar characteristics and are located in the same area as the subject property. Appraisers select comps based on factors such as location, size, age, condition, and features, choosing at least three recent sales within the last 12 months. Adjustments are then made to the sale prices of these comparable properties to account for any differences, such as additional bedrooms, updated kitchens, or lot size variations. If the sales price of the subject property falls within the range supported by these adjusted comparable sales, the appraisal will affirm that price.

Lender Influence on Appraisal Outcomes

Mortgage lenders require an appraisal to ensure the property serves as collateral for the loan amount requested. The loan-to-value (LTV) ratio, which compares the loan amount to the property’s value, is a metric for lenders. If the appraised value comes in lower than the sales price, the lender will only finance based on the lower appraised value, not the contract price. This creates an “appraisal gap,” requiring the buyer to cover the difference in cash or renegotiate the sales price with the seller. While appraisers are independent professionals guided by Appraiser Independence Requirements (AIR), the financial implications of a low appraisal often lead to adjustments to ensure the transaction proceeds with financing.