Certified Residential Appraiser Practice Exam

What is typically the primary purpose of an appraisal?

1. Tax assessment

2. Property sale

3. Loan qualification

4. Investment analysis

The correct answer is: Loan qualification

The primary purpose of an appraisal is to provide an unbiased estimate of a property's market value, which is most commonly utilized in the context of loan qualification. Lenders require appraisals to ensure that the value of the property supports the mortgage amount being requested. This is crucial for mitigating risk; if a borrower defaults, the lender wants to know that they can recover their investment through the property's value. While tax assessment, property sale, and investment analysis can also use appraisals, they are not the primary reason appraisals are conducted. Tax assessments are often based on predetermined criteria set by local governments and may not reflect current market conditions as closely as an appraisal. Property sales often rely on the value determined in an appraisal to guide negotiations, but the sale occurs after the appraisal process. Investment analysis may use appraisal values as part of evaluating potential investments, but the necessity for an appraisal primarily arises during loan qualification arrangements to protect lenders in real estate transactions.