What is a Real Estate Appraisal?
A real estate appraisal is a professional, independent assessment of a property's market value conducted by a licensed appraiser. Appraisals are most commonly required by mortgage lenders to ensure the property is worth at least as much as the loan amount. The appraiser physically visits the property, evaluates its condition, and compares it to recent comparable sales to arrive at an opinion of value.
For investors, appraisals matter in several contexts: when your end buyer uses financing (the appraisal must support the purchase price), when you refinance a BRRRR property (the appraisal determines how much you can pull out), and when selling a flip to a retail buyer (their lender will require an appraisal). Cash transactions between investors typically don't require appraisals because there's no lender involved.
How appraisals work
- Lender orders the appraisal: The buyer's lender selects an appraiser from an approved panel. The buyer typically pays the appraisal fee ($400-$600).
- Property visit: The appraiser visits the property, photographs it inside and out, and notes the condition, features, and any deficiencies.
- Comp analysis: The appraiser identifies 3-6 comparable sales (recently sold properties of similar size, age, condition, and location) and makes adjustments for differences.
- Report delivery: The appraiser delivers a written report (typically a URAR -- Uniform Residential Appraisal Report) with the opinion of value.
Appraisal vs investor comp analysis
Investors and appraisers both use comparable sales, but the approach differs. Investors calculating ARV typically focus on recently renovated properties to estimate what their property will sell for after repairs. Appraisers evaluate the property in its current condition (or "as completed" for construction loans) and may use a broader set of comps including non-renovated properties.
This creates a potential disconnect: your ARV estimate might be $300,000 based on renovated comps, but the appraiser might value the property at $280,000 using a different set of comparables. When selling a flip, a low appraisal can kill the deal or force a price reduction. This is why accurate comp analysis that mirrors what an appraiser will find is so important.
Low appraisals and what to do
If the appraisal comes in below the contracted purchase price, several options exist:
- Renegotiate price: Reduce the sale price to match the appraised value.
- Buyer covers the gap: The buyer pays the difference between the appraised value and purchase price in cash, on top of their down payment.
- Challenge the appraisal: Provide additional comps or correct factual errors. Success rate varies.
- Order a second appraisal: The buyer can request a new appraisal (additional cost), though lenders may not allow this.
- Cancel the contract: If there's an appraisal contingency, the buyer can terminate.
BRRRR and refinance appraisals
In the BRRRR strategy, the refinance appraisal is the critical moment. The appraised value determines how much the lender will loan at 75% LTV, which determines how much of your initial investment you can recover. Getting the highest possible appraisal on a BRRRR refinance means choosing strong comps, making sure the property shows well, and ensuring all renovation work is complete and visible. Some investors provide a packet of comp information to the appraiser to help guide the process.