An appraisal is an evaluation of the property being sold for the purpose of determining the property’s fair market value. This value is supposed to reflect the most likely sale price of a property in a reasonable period of time.
Since a bank is investing in the property as well as in the buyer, the bank wants some assurance that the property is actually worth what the buyer is paying for it. Additionally, the bank wants to be satisfied that it can resell the home, should the bank have to foreclose on the home.
Appraisals, however, work with historical data. An appraisal, as described earlier, uses three methods of evaluation and gives weight to the method that the appraiser believes to be most accurate. The problem with historical data is that it depends on sales in the past. If a market is hot and rising, with prices increasing at 1% a month, a sale five or six months ago is going to be off in value.
Although an appraiser can adjust a value based on the time of the sale, many appraisers are reluctant to do so in a rising market. In a slowing market, many appraisers are conservative and tend to appraise on the low side, which creates a problem for the transaction.