An appraisal is a formal opinion of a property's value prepared by a licensed appraiser, most often because a lender requires one before funding a loan. For residential rentals the appraiser typically leans on recent sales of comparable properties, adjusting for differences in size, condition, and location; for larger income property the income approach — value derived from net operating income — carries more weight. The lender uses the result to size the loan, since loan-to-value is calculated against the lower of price and appraised value.
An appraisal below the contract price is one of the most common ways a deal wobbles: the buyer must bring more cash, renegotiate, or walk under an appraisal contingency. It is worth remembering what an appraisal is not — it is one professional's estimate on one date, not a guarantee of resale value, and it is distinct from an inspection, which assesses condition rather than worth.