What An Appraisal Measures And What It Misses

An appraisal is often treated as a verdict on what a property is worth. It is more accurately a professional opinion produced under rules, for a stated purpose, on a stated date.

The three approaches and when each applies

The sales comparison approach values a property against recent sales of similar properties, adjusted for differences. It dominates where an active market of comparable transactions exists.

The income approach converts the property's income into value using a capitalisation rate or a discounted cash flow. It dominates for commercial and larger residential income property.

The cost approach estimates what it would cost to rebuild, less depreciation, plus land value. It matters most for unusual properties and new construction where the other two are thin.

The client and the purpose shape the work

An appraisal ordered by a lender is prepared for that lender's use in a lending decision. Its scope, its assumptions and its definition of value are set accordingly.

Market value in that context has a technical definition involving a willing buyer and seller, adequate exposure to the market and no unusual pressure on either side.

A real transaction may violate several of those conditions. A motivated seller, a short marketing period or a buyer with a specific strategic reason can all produce a price the definition excludes.

Why appraisals lag a moving market

Comparable sales are historical by construction. A sale that closed recently was negotiated earlier, so the evidence describes conditions from some weeks or months before.

In a market moving quickly in either direction, this lag produces appraisals that trail the current position. The appraiser is not wrong; the data available describes the recent past.

Where transaction volume falls, the problem worsens, because the pool of usable comps thins and older or less similar sales must be used with larger adjustments.

What an appraisal does not cover

It is not an inspection. An appraiser observes condition but does not test systems, open walls or evaluate structural adequacy in the way a qualified inspector does.

It generally does not evaluate title, boundary disputes, environmental conditions or code compliance, each of which has its own specialist and its own report.

It also carries a date. An appraisal states value as of a specific day, and it makes no claim about what the property will be worth later.

When value and price diverge

A price is what two specific parties agreed. A value is an estimate of what the broader market would pay. Divergence between them is normal rather than an error.

For the borrower, the practical consequence is that the loan is sized on the appraisal. Any excess of price over appraised value becomes additional cash at closing.

Reconsideration processes exist where an appraiser has missed relevant sales or made a factual error, but they address evidence rather than disagreement about judgement.