When you get a loan for a property, chances are you are going to borrow that money from a bank or other institutional or private lender. This lender will then want to have you make monthly mortgage payments to “amortize” the loan – literally meaning, “kill off.”

If you fail to make those mortgage payments, however, the lender can then foreclose on the home, which would include taking it back from you and sell it on the open market. To be able to sell it on the open market, whether through an auction or through a listing agent, the lender needs to ensure that the property can cover the loan amount when sold.

Your Realtor probably will show you “comps” when you look at the home. Typically, “comps” are comparable properties that sold in a one mile radius in the last six months. This will give you an idea of where your contemplated purchase stands – in the middle is good, towards the bottom is the best.

The appraiser goes through a similar database of sold properties, although probably uses the MLS as well as the tax records to price homes that sold outside the MLS. Then the appraiser adjusts for differences to come up with an appraisal value for your property. Hopefully, the appraisal value falls within the price the lender has agreed to fund for your mortgage amount. If it does not, further negotiations might be necessary with the seller or you would move on to another property.

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