Whether you’re buying or selling a home, appraisals can be one of the more confusing aspects of the real estate transaction. While the old saying “It’s only worth what someone’s willing to pay,” might seem like common sense, appraisals can often shake up a deal even after a buyer and seller agree on a purchase price that appeases both parties. Even if the principals agree, appraisals are a way for a lender to ensure they’re not loaning more money than the property is actually worth- protecting themselves from losing money should the loan fall through, and protecting the buyer in the event that the home is damaged or destroyed, and not covered by insurance for the full amount that they still owe on the loan.

Appraisals are conducted by licensed professionals who assess the local market with the goal of establishing a value the property, using recent sales of similar properties as a general guide. Location is the starting point in any appraisal. The best properties for comparison are those located a short distance from the appraised property, usually within about a five-mile radius. The appraiser will compare the property with others in the same neighborhood, community, or housing development.

The next step is discovering properties that share major characteristics with the one being appraised. Size, style, and construction are often major factors that contribute to a home’s value. For example, in a housing development, many homes are built to similar style standards, and recent sales of neighboring properties can give an appraiser an easy point of reference for the property in question. In some cases, there may not be an exactly comparable home, such is in a general mixed residential area, and it’s then up to the appraiser to identify which homes most closely match the property they’re appraising. Square footage, the size of the plot the home is sited on are common measures.

A major part of any appraisal is the condition of a home. A well-maintained property is always going to be more valuable than one that needs extensive repairs, regardless of how many features or additions the home has. The age of a property can also be a major factor in an appraisal, both in terms of adding but also subtracting value. An older home is generally going to need more attention: from simple cosmetic fixes and the need for updating, to entire overhauls of plumbing or electrical wiring. At the same time, a truly historic home could have more inherent value than a newer construction. Each of these factors must be weighed into the appraisal. A new home located in a historic neighborhood may not be as valuable as an original home, despite being in a better condition or having more square footage.

Market conditions play a large part of the appraisal process. A weak market could mean that the price reached by the buyer and seller is actually higher than that of what similar homes are selling for. This also applies to any additions or improvements made to the home, such as a pool or large garage. Changing market trends in an area can affect the value added with each of these additions. An expensive project does not always result in an equal increase in the value of a home, and it’s not uncommon for a seller to list their price above the ultimate appraised value, because they have a lot of money invested into a property. Upgrades and renovations can lead to disparities in appraised price and asking price and should be considered carefully before someone plans to sell.

The appraiser is there to protect all parties involved: both the buyers, sellers, and lender. Once the appraisal has been completed, the lender is notified of the value. The lender will decide if the loan amount is either confirmed or denied. Then, it’s up to the principals to decide to renegotiate the deal if the appraisal comes in too low, make up the price difference with a cash payment, or cancel the sale outright.

Appraisals take a lot into account, but the basic principles aren’t necessarily complicated for the buyer or seller. By checking on recent sales in your area and comparing to the deal you’re trying to make, its easier to get an understanding of what to expect from an appraisal. For sellers, this means being able to price your home reasonably from day one; and for buyers, it means being able to enter negotiations with the confidence that your lender will actually lend you the money you need.