Appraisal & Valuation

Appraisal and Valuation: The Basics

What Is A Drive-By Appraisal And How Accurate Is It? (Rocket Mortgage, Oct. 31, 2024)

A drive-by appraisal, also sometimes referred to as a summary appraisal, is an alternative type of home appraisal during which an appraiser examines only the property’s exterior. To determine the home’s fair market value, the appraiser will consider the results of the appraisal and all available real estate records and data.

What Is A Desktop Appraisal And How Does It Work? (Rocket Mortgage, Jul. 29, 2024)

A desktop appraisal is a property valuation that is completed at the appraiser's desk, using third party data such as tax records or information listed on the multiple listing service (MLS), instead of an interior/exterior inspection of the property.

What You Should Know about Real Estate Valuation (Investopedia, Aug. 10, 2024)

“Value is not necessarily equal to cost or price. Cost refers to actual expenditures – on materials, for example, or labor. Price, on the other hand, is the amount that someone pays for something. While cost and price can affect value, they do not determine value. The sales price of a house might be $150,000, but the value could be significantly higher or lower. For instance, if a new owner finds a serious flaw in the house, such as a faulty foundation, the value of the house could be lower than the price.”

Home Appraisals: Your Key to a Successful Refinance (Investopedia, Jun. 12, 2024)

“An appraisal is a professional opinion of your home’s value and is an important step in the home-buying process. Appraisals are conducted by licensed or certified professionals, who provide opinions as unbiased third parties. The appraiser gets paid for valuing your home but has no skin in the game when it comes to whether you qualify for a mortgage or refinance as a result of their estimate.”

What is an appraisal?pdf (National Association of Appraisers, Jul. 2, 2023)

The National Association of Appraisers explains appraisal basics on its "What is An Appraisal" information sheet.

The Cure for Appraisal Gap Anxiety (HousingWire, Mar. 24, 2023)

“An appraisal gap is the difference between what a buyer agreed to pay for a home in a purchase contract and what an appraiser concludes as the fair market value of the property.  This is usually viewed as a problem when the appraised value is below the purchase contract amount since lenders will not approve a loan amount higher than the appraisal. And homebuyers certainly don’t want to overpay and start off their ownership journey with negative equity.”

Appraisal and Fair Housing

FHA Rescinds Multiple Appraisal-Related Policies (National Association of REALTORS®, Mar. 21, 2025)

On March 19, 2025, the Federal Housing Administration (FHA) published Mortgagee Letter (ML) 2025-08, Rescinding Multiple Appraisal Policy Related Mortgagee Letters, to immediately rescind the policy guidance published in the following MLs:

• ML 2024-16, Extension to the Effective Date of Appraisal Review and Reconsideration of Value (ROV) Updates, dated August 6, 2024;
• ML 2024-07, Appraisal Review and Reconsideration of Value, dated May 1, 2024; and
• ML 2021-27, Appraisal Fair Housing Compliance and Updated General Appraiser Requirements, dated November 17, 2021.

Supporting Your Value: Discover AI Tools for Appraisers (National Association of REALTORS®, Jan. 30, 2025) 

Appraisers face a constant challenge to provide accurate property valuations amid changing market conditions. New policies require appraisers to clearly identify market trends and apply specific time adjustments to comparable sales data based on these trends and include the methodology used to determine these adjustments in the appraisal report. But how do appraisers derive these adjustment amounts and what new technology can be used in the process? Jim Amorin, author of the Generative Shift, Preparing Appraisers For Artificial Intelligence Models Like Chat GPT, and Josh Walitt, educator and Principal Consultant at Walitt Solutions, dove into this topic exploring the various AI tools that can be used to develop adjustments and how to use them, but also how appraisers can make sure the information they are getting with those tools is accurate.

Appraisal Bias Undervalues Homes and Robs Homeowners of Equity — Here's How To Spot It (Business Insider, Jul. 22, 2024)

Bias in the appraisal process strips homeowners of wealth and hurts the values of neighboring homes.

Studies show that homes in areas with mostly residents of color are often undervalued compared to homes in majority white areas.

Red flags that could indicate discrimination include mentions of an area's racial makeup or poorly chosen comps.

The National Fair Housing Alliance Applauds FHFA’s Continued Leadership in Combating Appraisal Bias (National Fair Housing Alliance, Jan. 17, 2024)

“FHFA’s most recent analysis is consistent with numerous news stories as well as research by Fannie Mae, Freddie Mac, Drs. Junia Howell and Elizabeth Korver-Glenn, Dr. Andre Perry and the Brookings Institution, and NFHA that document the serious and systemic problem of appraisal bias for consumers and communities of color. Appraisal bias exacerbates the large and growing Black-White and Latino-White wealth gaps by causing families of color to lose out on homeownership opportunities or get lower valuations.”

Protecting Homeowners from Discriminatory Home Appraisals (Office of Public Affairs, U.S. Department of Justice, Mar. 13, 2023) 

The CFPB administers and enforces federal consumer financial protection laws like the Equal Credit Opportunity Act (ECOA), which is a landmark civil rights law that protects individuals against discrimination in accessing and using credit. These protections apply to every aspect of a credit transaction with a mortgage lender, including the important step of mortgage lenders relying on home appraisals before approving a loan.

The Department of Justice (DOJ) enforces both ECOA and the Fair Housing Act (FHA), which protects individuals from many forms of discrimination in housing, including discriminatory residential valuations conducted by appraisers and the use of those appraisals by mortgage lenders.

Black Couple Settles Lawsuit Claiming Their Home Appraisal Was Lowballed Due to Bias (NPR, Mar. 9, 2023)

“This time the couple decided to "white wash" the house. They removed family photos and art work, books, hair products and anything else that might indicate that a Black family lived there. They also asked a white friend to be present at the house and greet the appraiser as if she were the homeowner and to display some of her family photos in the house. The Austins were not at home during the appraisal. The new appraiser concluded the house was worth $1,482,500 – nearly half a million dollars higher than Miller's estimated value.”

Window to the Law: Ensuring Impartial Appraisals (National Association of REALTORS®, Feb. 7, 2023)

“Real estate transactions rely on an objective appraisal to determine a home’s market value, but evidence suggests there’s potential for racial bias in the appraisal process. Learn more about the Property Appraisal and Valuation Equity action plan to eliminate racial and ethnic bias in home valuations and find tips to ensure an impartial appraisal.”

Fair Housing & Appraisal Bias (Appraisal Institute)

“The Appraisal Institute is the leading professional association of real estate appraisers. The Appraisal Institute’s Code of Professional Ethics and Standards of Professional Practice comprise requirements for ethical and competent practice, and advance equal opportunity and nondiscrimination in the appraisal profession. The Appraisal Institute’s work includes an array of professional education and advocacy programs, and stewardship of the highest level professional credentials in residential and commercial real estate appraisal.”

Appraisal Information Resources for NAR Members

Members of NAR enjoy appraisal education benefits, GAA and RAA designations, an online referral network, as well as representation on the Real Property Valuation Committee and the Real Property Valuation Forum. The Realtors Property Resource® (RPR®) is also available to NAR members. Members who take advantage of educational benefits and advanced valuation tools will be better positioned in the industry to succeed in their respective markets.

Appraiser Independence

NAR's Appraiser Independence page provides NAR's position on appraiser independence, background on the issues, and resources for communicating with appraisers.

Appraisers are sometimes asked by lenders and AMCs to include distressed transactions as comparable sales, to complete the appraisal in unreasonable and unrealistic time spans, and comply with a scope of work not justified by the fee being offered. NAR believes this interferes with appraiser independence, causing harm to the real estate recovery, and harm to consumers.²

In February 2012, NAR released its Responsible Valuation Policy, which supports and encourages credible, independent valuations of Real Property.

Appraiser/Agent Communication

Residential Appraisal Process: FAQs for Agents was developed by NAR’s Real Property Valuation Committee for agents who are interested in educating prospective homebuyers about appraisals. NAR has found that confusion persists about appraisal regulations, especially those that affect how real estate agents and their clients communicate with appraisers.  Frequently asked questions include “Can I speak to the appraiser?” and “What kind of information should I provide to the appraiser?” 

Charlie Lee, from NAR Legal Affairs gave us a Window to the Law: Working with Appraisers video in Dec. 2018, in which he discussed the regulatory background of appraiser independence rules, the different roles of appraisers and real estate agents, and then covered some best practices.

Appraisal Management Companies (AMCs)

An Appraisal Management Company (AMC) works with lenders and appraisers to facilitate the ordering, tracking, quality control, and delivery of appraisal reports. On February 4, 2025, NAR issued a comment letterpdf to the Appraisal Subcommittee (ASC) in response to a proposed rule on the "ASC Enforcement Authority Regarding the Effectiveness of State Appraiser and Appraisal Management Company (AMC) Regulatory Programs." 

NAR policy supports independent valuations of real property performed by state credentialed appraisers in adherence with the Uniform Standards of Professional Appraisal Practice (USPAP); therefore, it is crucial that effective oversight of both appraisers and the appraisal management companies is in place and exercised. While the proposed rule codifies ways the states should oversee appraisers, it omits specific language on AMC monitoring and ways to report AMC violations.

This comment letter suggests additional monitoring, adding whistleblower protection, promoting consistency in regulation and investigation, monitoring adequacy of jurisdictions’ funding, and measurement of how effectively new rules and oversight affect compliance.

¹ The Appraisal Foundation, A Guide to Understanding a Residential Appraisal (Washington, DC), 3, www.appraisalfoundation.org
² NAR Statement on Appraiser Independence, April 2011
³ Data on appraisal issues are from a monthly survey for the REALTORS® Confidence Index, posted at www.nar.realtor

Terminology

BUSINESS ENTERPRISE VALUE (BEV)
"A term applied to the concept of value contribution of the total intangible assets of a continuing business enterprise such as marketing and management skill, an assembled work force, working capital, trade names, franchises, patents, trademarks, contracts, leases, and operating agreements." (The Dictionary of Real Estate Appraisal, 4th ed., Appraisal Institute)

GOING-CONCERN VALUE
"An operating business enterprise that is expected to continue." (The Dictionary of Real Estate Appraisal, 4th ed., Appraisal Institute)

GOODWILL
"An intangible, salable asset arising from the reputation of a business; the expectation of continued public patronage; including other intangible assets like trade name and going concern value...," (The Language of Real Estate, 5th ed., John W. Reilly)

Valuing the Intangible

What Is an Intangible Asset? (Investopedia, Jun. 3, 2024)

It is often difficult to determine an intangible asset's future benefits and lifespan or the costs associated with maintaining it. The useful life of an intangible asset can be either identifiable or non-identifiable. Most intangible assets are considered long-term assets with a useful life of more than one year.

The Impact of Intangibles—Unlock Unseen Value (Deloitte, Feb. 19, 2024)
Regular reviews of intangibles portfolios are necessary to keep strategies up to date and aligned with business objectives. Know-how is the number one intangible asset that drives competitive advantage, and data is consistently undervalued as a driver of revenue and value.
Companies may want to invest in upskilling and auditing the value created by their investment in intangibles to define where pockets of value lie and disseminate knowledge about the scope and importance of intangibles throughout the organization.

A Guide to Tangible and Intangible Assets (Yieldstreet, Feb. 15, 2024)

Before investing in a company, an investor may choose to evaluate both tangible and intangible assets to get a complete picture of a company’s value and potential. Tangible assets, like buildings and machinery, provide stability and can serve as collateral. This contribute to the company’s immediate financial health. 
In contrast, intangible assets, such as patents and trademarks, drive future growth and innovation, even though they are harder to quantify and are more volatile. 

The Three Valuation Approaches (Quantive, Sep. 10, 2023)

“The three widely used valuation methods used in business valuation include the Asset Approach, the Market Approach, and the Income Approach.

The three approaches vary in the way they conclude to value, but the goal of each approach is still the same: to assess the value of the operating entity (i.e., the business).”

Hotels & Motels

Everything You Must Know to Get Your Hotel Valued (Arrowfish, Aug. 9, 2024)

Location: Hotels situated in prime areas, such as city centers, tourist attractions, business districts, and transportation hubs, tend to have higher values due to increased demand and higher occupancy rates. For example, a hotel near the V&A Waterfront in Cape Town will have a higher valuation compared to a property outside this key area. The proximity to amenities and attractions significantly boosts the hotel’s market appeal and financial performance.

Seven Essential Steps to Valuing a Company: Insights from the Hospitality Industry (Kiplinger, May 31, 2024)

There are several methods to value a company, including the discounted cash flow (DCF) method, comparable company analysis and asset-based valuations. The choice depends on the nature of the business and the purpose of the valuation.

How Much is My Property Worth? Determining Fair Market Value (Hotel Management, Feb. 16, 2024)

Due to the fluctuating nature of the hotel business, the most common way brokers will evaluate your property is based on current performance, while considering past results and future potential. Employing a room revenue multiple and a capitalization rate based on your net operating income are the most straightforward mechanisms for determining how much your property is worth based on actual property performance.

Retail Establishments

Beyond the Dark Store: Exploring Valuation Challenges and Methods for Big-Box Retail (Invoke Tax Partners, Jul. 2, 2024)

The dark store theory argues that operational big-box stores should be valued as if they were empty, basing property tax assessments on the characteristics of vacant and possibly obsolete properties. This approach has led to significantly lower tax assessments for operational stores, impacting municipal budgets and redistributing tax burdens. The theory’s application often involves the sales comparison approach, where the chosen comparable properties are vacant, potentially skewing the market value assessments of fully operational stores.

How To Value a Retail Business (Top Hat Business Brokers, Feb. 8, 2024)

With a market-based valuation, your company’s earning potential in relation to market demand will determine its value approximation. The purpose of this valuation method is to deem a business’s fair market value using the going rate of competing companies and similar enterprises in the same market.
When using a market-based retail business valuation method, you must specify the goods and services your company offers. The method also includes an assessment of the business’s goodwill or the difference between what someone would pay to buy the business and its amount of net assets.

How to Value a Retail Store (ProjectionHub, Nov. 8, 2023)

Income-Based Valuation
Rationale: Focuses on the earnings power of a retail business, considering its revenue generation and profitability.
Usage: Discounted Cash Flow (DCF): Involves forecasting the retail business's future cash flows and discounting them back to their present value at a rate that reflects the risk involved.
Capitalization of Earnings: This method calculates the expected normal earnings of the retail business and divides them by a capitalization rate that assesses risk and return on investment.

How to Sell and Value a Retail Business (Raincatcher, May 2023)

Learn about factors that make a retail business valuable, formulas for calculating value, tips for reducing risk, and how to prepare for selling the business.

Small Firms and Franchises

3 Ways to Value Any Small Business (The Ascent, May 10, 2024)

Asset-based valuation doesn’t expressly incorporate a company’s profitability or its opportunity for growth. Still, it can be expressed through intangible assets, things of value you can’t see or touch. Certain intangibles might not even be on the business’s balance sheet before valuation.

How to Accurately Determine the Value of Your Small Business (Lake County Advisors, Jan. 8, 2024)

The market value approach is one of the most common approaches used by buyers, which involves comparing your business to similar recently sold businesses. This method relies on available market data to establish a comparative value.
It works well for businesses operating in sectors with numerous comparable sales. For example, a retail store chain can be evaluated based on recent sales of similar retail companies, offering a market-relevant valuation based on actual transaction data. A very common market approach is to evaluate market comps, comparing what their Adjusted EBITDA was vs. what the sale price was. This creates market multiples, which can then be applied to your own business to determine valuation.

Conducting A Franchise Appraisal & Determining Business Value (Garner, Ginsburg & Johnsen, May 8, 2023)

In a formal franchise appraisal, the appraiser will combine the three valuations to come to a final figure. The valuation of your franchise business may be affected by other factors, as well. One factor is the purpose of the franchise appraisal. For example, if you are trying to determine the value in order to avoid estate taxes, you will want a low value. On the other hand, if you are looking to sell, you will want a higher value. We have seen instances in which franchisees looking to sell their business have been haunted by a low valuation made as part of an estate-planning process.

Franchise Business Valuation Multiples (Raincatcher, Aug. 2023)

“Valuation multiples play a pivotal role in gauging the worth of a franchise business. They provide valuable insights into your company’s financial standing and operational efficiency by benchmarking it against similar enterprises in the franchise market.”

Valuation Issues

The Role of Risk in Business Valuation (BizWorth, Oct. 30, 2023)

Operational Risks

• Operational risks encompass challenges associated with a company's day-to-day activities. These risks can include supply chain disruptions, labor issues, production delays, or quality control problems.
• Evaluating operational risks helps in assessing the company's ability to maintain consistent revenue and profitability.

If Your Divorce Case Includes a Business, Expect a Valuation (The Marks Law Firm, Sep. 8, 2023)

Business valuators usually take one or a combination of the following approaches when they value a business: (1) income-based approach; (2) asset-based approach; or (3) market-based approach.
Instead of going into detail about each of these approaches, here are the basics that you want to know. Every approach takes some or all of the following into consideration: (1) a business’ profitability (starting with a review of the business’ profit and loss statement); (2) the goodwill of a business; and (3) a business’ tangible and intangible assets.

The Unpopular Truth About Business Valuations: Understanding their Limitations and Shortcomings (Venture First, Mar. 7, 2023)

Business valuations can be manipulated by unethical individuals or organizations. For example, a business owner may inflate the value of their business to attract investors or to sell it at a higher price. Alternatively, an investor may undervalue a business to acquire it at a lower price. Valuations can also be manipulated through accounting practices or by misrepresenting the financial information of a business. 

How Economic Factors Impact Business Valuations (Marcum, Feb. 20, 2023)

For companies with flat or minimally increasing revenues, these higher costs directly reduce the earnings available to business owners. On the most basic level, a reduction in earnings equates to a reduction in the value of a company.

eBooks & Other Resources

Appraising the Appraisal (eBook)

The Performance Appraisal Handbook (eBook)

Real Estate Appraisal (eBook)

The Art of Real Estate Appraisal (eBook)

Valuing a Business (eBook)

How to Get Started in the Real Estate Appraisal Business (eBook)

Business Valuation: An Integrated Theory (eBook)

Business Valuation and Taxes: Procedure, Law and Perspective (eBook)

Business Valuation for Dummies (eBook)

The Market Approach to Valuing Businesses (eBook)

Real Estate Market Valuation and Analysis (eBook)

The Small Business Valuation Book: Easy-to-use Techniques That Will Help You... Determine a Fair Price, Negotiate Terms, Minimize Taxes (eBook)

Books, Videos, Research Reports & More

As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.

The Valuation of Office Properties: A Contemporary Perspective (Appraisal Institute, 2009) HD1393.58.U6 S55

Business Valuation Bluebook: How Successful Entrepreneurs Price, Buy, Sell and Trade Businesses (Facts on Demand Press, 2005).HD 1387 Si4

Business Valuation Discounts and Premiums (John Wiley & Sons, Inc., 2001) HD 1387 P88bv

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