Appraisal
A licensed professional's independent estimate of a property's market value.
Definition
An appraisal is a formal, written opinion of a property's value performed by a licensed or certified appraiser. Lenders typically require an appraisal before funding a mortgage to ensure they aren't lending more than the property is worth.
Appraisers use three primary approaches: the sales comparison approach (comparing to recent comparable sales), the income approach (used for rentals — capitalizing the net operating income), and the cost approach (estimating what it would cost to rebuild). Most residential appraisals rely primarily on the sales comparison method.
For investors, appraisals matter in multiple scenarios: buying (to confirm you're not overpaying), refinancing (the key to the BRRRR strategy — pulling out equity after a renovation), and when disputing a tax assessment. A low appraisal can kill a deal or limit the amount you can cash-out refinance.
Related Terms
After Repair Value (ARV)
The estimated market value of a property after all renovations are completed.
Comparable Sales (Comps)
Recent sales of similar properties used to estimate the market value of a subject property.
BRRRR Method
Buy, Rehab, Rent, Refinance, Repeat — a strategy to recycle capital into multiple rental properties.
Loan-to-Value (LTV)
The ratio of a loan's balance to the property's appraised value, expressed as a percentage.
Refinance
Replacing an existing loan with a new loan — often to access equity, lower the rate, or change loan terms.
Also in "A"
Absorption Rate
The rate at which available homes sell in a given market during a time period.
Amortization
The process of paying off a loan through regular scheduled payments of principal and interest.
Appreciation
The increase in a property's value over time, either through market forces or investor-driven improvements.