What is 'Appraisal'

An appraisal is a valuation of property, such as real estate, a business or an antique, by the estimate of an authorized person. To make a valid appraisal, the authorized person must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals are typically used for taxation purposes or to determine a possible selling price for the property in question. The appraiser can use any number of valuation methods to determine the appropriate value to assign, including the current market value of similar properties, quality of the property and valuation models .

BREAKING DOWN 'Appraisal'

In real estate transactions, appraisals help lenders determine the value of properties they are being asked to finance. If a home appraisal comes in below the amount of the purchase price, mortgage lenders are likely to decline to fund the deal. Unless the prospective buyer is willing and able to come up with the difference between the appraised value and the lender's financing offer, the transaction will not go forward.

Appraisals and Insurance

Some types of insurance policies also require appraisals of goods being insured. Homeowners and renters insurance policies protect policyholders against the loss of personal property due to theft or damage. These blanket policies cover items up to a preset dollar limit. Obtaining an appraisal of the contents of a home creates an inventory of the owner's property and establishes its value. This helps ensure a swift settlement if a claim is filed.

When the value of specific items exceeds a homeowners policy limit, the policyholder may wish to obtain additional insurance that covers luxury items such as jewelry or collectibles, including art objects and antiques. Prior to issuing personal property insurance policies for high-end items, many insurance underwriters require applicants to have the object appraised. The appraisal creates a record of the item's existence, along with its description. It also helps establish the item's actual value.

Some insurance contracts include an appraisal clause that specifies the owner agree to obtain an appraisal from a mutually agreeable expert in the event of a dispute between the owner and the insurance company. Neutral appraisals can speed resolution of a settlement and keep disputes from escalating into lengthy and expensive lawsuits.

Other Uses for Appraisals

For tax purposes, appraisals are useful in determining the value of charitable donations for itemized deductions. They can also be a helpful tool in resolving conflicts between heirs to an estate by establishing the value of the real estate or personal property to be divided.

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