Purpose of Appraisal Reports

Lenders process appraisal reports with two goals in mind:

  1. Determine the subject property's fair market value.
  2. Confirm that the subject property meets the parameters of the specific loan program.

The most important element that the appraisal report provides is the market value of the property. This element is the main difference between the appraisal and building inspection, which focuses the property's structure and mechanical equipment.

To compare the descriptions contained within this article with an actual appraisal report, please go to the sample appraisal report.

The appraised market value determines the LTV and consequently limits the amount of money that an applicant may borrow on a property. This appraised value normally is a reconciliation of at least two or three value calculation methods.

  • Value indicated by market data (sales comparison) approach. This is the average selling price of recently sold properties of the same type, quality and location as the subject property—with adjustments. All appraisal reports will normally contain this approach.
  • Value indicated by income approach. This estimate deals with income-producing properties and takes into account the rental rates in the property's area, neighborhood or region.
  • Value indicated by cost approach. This estimate is based on how much it would cost to build a comparable house—less depreciation. All appraisal reports will normally contain this approach.

After obtaining the necessary data for the above valuation methods, the appraiser will then arrive at a best estimate of value. This final estimate is the appraisal value, which is determined through a reconciliation of the different value approaches.

Appraisers are not supposed to produce appraisal reports for the purpose of meeting specific valuation goals set by the party ordering the report. However, most appraisers will inform the loan officer if preliminary estimates show that the appraised value will fall below the contract price or loan target. In such a case, the full appraisal order can be canceled.

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