Real Estate Appraisal Types Explained

An appraisal is an expert valuation of what a property is worth, and there are two types of appraisals in real estate. There's a property tax appraisal, which is used to determine how much a homeowner must pay in property taxes, and the other is a mortgage lender appraisal, which is needed to approve a buyer's home loan.

How Does the Appraisal Process Work?

Although each type of appraisal serves a different purpose, all appraisals are conducted by a licensed appraiser who acts as a neutral third party. The appraiser examines the subject property and comparable homes (also called comps) to determine the property’s fair market value.

Property comps are similar homes in the same area that have sold in the past six months, with the same number of bedrooms, bathrooms, and square footage. Then adjustments are made based on certain factors. For instance, the appraiser might add value if the subject property has an extra half-bathroom. But if the subject property has an unfinished basement, the appraiser may deduct value.

Below are more details on property tax appraisals and mortgage lender appraisals and the differences between the two.

Property Tax Appraisal

Property tax appraisals are ordered by the county in which the home is located. The appraisal district for the county sends a licensed appraiser to conduct a visual inspection of the home and collect data, including its size, location, condition, and features to come up with a market value that is used to determine how much the property owner pays in property taxes.

With few exceptions, Texas Tax Code Section 23.01 requires the taxable property to be appraised at market value as of Jan. 1 and at least once every three years. According to the Texas Comptroller, market value is the price a property would sell for under the current market conditions, and the transaction met these expectations:

• It is offered for sale in the open market with a reasonable time for the seller to find a purchaser.
• Both the seller and the purchaser know of all the uses and purposes to which the property is adapted and for which it is capable of being used and of the enforceable restrictions on its use.
• Both the seller and purchaser seek to maximize their gains, and neither is in a position to take advantage of the need or demand of the other.

Property tax appraisals in Texas use one of three appraisal methods to determine a home’s fair market value:

• Sales/market approach: Based on recent sales data from comparable properties in the same area.
• Cost approach: Based on how much it would cost today to build an identical property and the depreciation of the property's current structure.
• Income approach: Used when appraising an income-producing property and determining property value through income and expenses analysis.

If a homeowner disagrees with their appraisal district’s value of their property or believes there are errors, they can file an appeal and provide evidence to support their claim.

Mortgage Lending Appraisal

In a home sale, when the seller accepts the buyer's offer, and the property goes under contract, the buyer’s mortgage lender will order an appraisal. This appraisal is required before the buyer’s mortgage can be approved, as it ensures their lender is not issuing a loan for more than what the property is worth.

The lender selects a licensed appraiser to conduct an on-site inspection, collect data and use the sales approach to compare the subject property with similar homes recently sold to determine its appraised value. The appraiser then submits their appraisal report to the lender.

Per the Consumer Financial Protection Bureau, mortgage lenders must provide copies of the appraisal to the borrower when it’s completed or no later than three business days before closing, whichever is earlier.

If a homebuyer or seller believes the appraised value is inaccurate due to errors, inadequate property comps, or other considerations, they may request a reconsideration of value (ROV) and provide evidence to support their claim.

Appraisals are an essential part of real estate transactions, whether for property tax or mortgage lending purposes, and are critical in determining a property's value. Understanding the appraisal process can help buyers and sellers make informed decisions and ensure that they receive a fair valuation of their property.

FAQs: Texas Property Tax Appraisals

How do I find what appraisal district I'm in?

Your appraisal district and its contact information can be found by selecting your county on the Texas Comptroller’s directory here.

Do I get charged for my property tax appraisal?

No. Your taxing authority incurs the expense for your property tax appraisal.

What appraisal district is Katy, Texas located in?

If you own property in Katy, Texas, your appraisal district would be one of these three counties – Harris, Fort Bend, or Waller.

Will my appraisal affect my property taxes?

Appraisal districts are responsible for determining the market value of your property. The taxing jurisdictions (county, cities, schools, hospital districts, and water districts) decide what you pay in property taxes based on the tax rates used to fund their operating budgets. The tax rates are expressed as a dollar amount for every $100 of taxable value.

Property taxes are then calculated by dividing your taxable value by one hundred and multiplying by your jurisdiction’s tax rate. For example:

How does the Homestead Cap in Texas affect my property appraisal?

The Homestead cap limits increases of assessed value to 10% from year to year if the property falls under the homestead exemption. But the 10% increase limit excludes any improvements made by the owner which would increase the property’s value.

The Homestead Cap does not limit market value increases. The appraisal determines market value, and the assessed value is used to calculate taxes. You may see both values listed for the same property, and the difference between the two is attributed to the Homestead Cap Loss amount.

Can I fight the appraisal value the tax district places on my home?

Yes, if you are dissatisfied with your property’s appraised value or if errors exist in the appraisal records on your property, you contact your appraisal district within 30 days of receiving a Notice of Appraised Value in April or May.

If you are not satisfied with the response received from your appraisal district, you can file a Form 50-132, Notice of Protest with the Appraisal Review Board (ARB). The ARB is a panel of citizens that listen to the evidence presented by the property owner and the appraisal district and make a determination regarding the property owner’s protest.

FAQs: Mortgage Appraisals

Are an appraisal and a home inspection the same thing?

An appraisal and home inspection are two separate things that serve different purposes. The mortgage lender orders the appraisal, conducted by an appraiser, to determine the home's market value. With the home inspection, the buyer hires a home inspector to identify any potential issues with the property before closing the sale.

Can appraisal be waived?

Yes, a lender may waive the in-person appraisal if the buyer and the property qualify for an appraisal waiver. In this case, the lender would use data generated by an automated underwriting system to determine the home's current market value based on data from recent home sales in the area.

Reasons why a lender would allow an appraisal waiver are if the same property was recently sold. For instance, the seller bought or refinanced the home last year, and an appraisal was completed then. Also, a lender may waive the in-person appraisal inspection to make the underwriting process more efficient, as skipping this step can help the loan close more quickly.

Not all buyers or properties qualify for an appraisal waiver, and not all lenders allow the waiver. To qualify, the borrower would need a strong credit score and must be purchasing or refinancing a one-unit property, with a minimum 20% down payment with a conventional mortgage.

Who pays for a mortgage appraisal?

Although the appraisal is to protect the lender and the appraiser is chosen by the lender, the buyer usually pays the appraisal fee. Sometimes, the seller may agree to pay for the appraisal as a seller concession, which are certain closing costs the seller covers on behalf of the buyer to make the deal more attractive.

Can an appraisal be paid for at closing?

Typically, the buyer will pay the appraisal fee at the closing, as it is rolled into their total closing costs. But the buyer may pay the fee upfront at the time of the inspection, if they choose or if required by their lender.

How does appraisal affect your mortgage?

Lenders cannot exceed the property’s appraised value when issuing a mortgage, so they use this value to calculate the borrower's loan-to-value (LTV) ratio.

For instance, if the seller accepted the buyer's offer to buy the home for $200,000, the maximum LTV for the buyer's mortgage is 97%, or $194,000. If the home appraises for only $190,000, the buyer must make up the $10,000 difference.

What happens if the house doesn't appraise for the sales price?

Using the same scenario above where the sales price was $200,000 but the home’s appraised value is $190,000, the buyer has these options:

• The buyer can pay the $10,000 difference out of their own pocket.
• The buyer can negotiate with the seller to lower the purchase price by $10,000 to match the home’s appraised value.
• The buyer can request a reconsideration of appraisal value (ROV) if they believe the appraisal is inaccurate.
• The buyer can terminate the sale and get their earnest money deposit back, if there is an appraisal contingency in the purchase contract. If there is no appraisal contingency, the buyer risks losing their earnest money.