What Is an Appraisal?

An appraisal is a valuation of property, such as real estate, a business, collectible, or an antique, by the estimate of an authorized person. The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals are typically used for insurance and taxation purposes or to determine a possible selling price for an item or property.

Understanding Appraisals

Appraisals are used in many types of transactions, including real estate. If a home valuation, for example, comes in below the amount of the purchase price, mortgage lenders are likely to decline to fund the deal. Unless the prospective buyer is willing and able to come up with the difference between the appraised value and the lender’s financing offer, the transaction will not go forward.

The appraiser can use any number of valuation methods to determine the appropriate value of an item or property, including comparing the current market value of similar properties or objects.

Appraisals are also done for tax purposes when determining the value of charitable donations for itemized deductions. Deductions can reduce your taxes owed to the IRS by deducting the value of your donation from your taxable income.

Appraisals can also be a helpful tool in resolving conflicts between heirs to an estate by establishing the value of the real estate or personal property to be divided.

Types of Appraisals

Home Appraisals

A home valuation is necessary during the process of buying and selling a home, as well as a refinance of an existing mortgage. A refinance is when a loan or mortgage is reevaluated and updated to current interest rates and new terms.

An appraisal determines the home’s value to ensure that the price reflects the home’s condition, age, location, and features such as the number of bathrooms. Also, valuations help banks and lenders avoid loaning more money to the borrower than the house is worth.

In the event of default, when the borrower can’t make the payments anymore, the bank uses the appraisal as a valuation of the home. If the home is in foreclosure, whereby the bank takes possession of the house, it must be resold to help the lender recoup any losses from making the mortgage loan.

It’s important to remember that when a bank lends for a mortgage, it gives the full amount of the home’s value to the seller on the date it’s sold. In other words, the bank is out the money and, in return, has a promise to pay, plus interest, from the borrower. As a result, the valuation is important to the lending process since it helps the bank avoid losses and protect itself against lending more than it might be able to recover if the borrower defaults.

Collectibles or Antiques

Professional appraisals can be done for many items, including collectibles, antiques, or grandma’s silver. Ideally, you’ll want multiple valuations for an item from an accredited professional. Appraisers might charge an hourly rate or a flat fee. 

A certified appraiser’s valuation will likely be fair and unbiased, whereas the local collectible shop has an incentive to offer you less for the item. Also, owners can get an idea of an item’s value by checking collectible magazines and online appraisal websites. Most websites charge a small fee, such as $10, to value an item. Of course, obtaining a value online is done through photos of the item and is not an official valuation, but it should give you an idea of what it’s worth before proceeding. If you decide to pursue an appraisal, the American Society of Appraisers has thousands of members and is a great place to begin searching for an accredited professional.

Appraisals and Insurance

Some types of insurance policies also require appraisals of goods being insured. Homeowners’ and renters’ insurance policies protect policyholders against the loss of personal property due to theft or damage. These blanket policies cover items up to a preset dollar limit. Obtaining an appraisal of the contents of a home creates an inventory of the owner’s property and establishes its value, which helps to ensure a swift settlement if a claim is filed.

When the value of specific items exceeds a homeowners policy limit, the policyholder may wish to obtain additional insurance that covers luxury items such as jewelry or collectibles, including art objects and antiques. Before issuing personal property insurance policies for high-end items, many insurance underwriters require applicants to have the object appraised. The appraisal creates a record of the item’s existence, along with its description. It also helps establish the item’s actual value.

Some insurance contracts include an appraisal clause that specifies the owner agrees to obtain an appraisal from a mutually agreeable expert in the event of a dispute between the owner and the insurance company. Neutral appraisals can speed the resolution of a settlement and keep disputes from escalating into lengthy and expensive lawsuits.

Home Appraisal Process and Cost

The home appraisal process typically begins after a buyer makes an offer on a home and that offer is accepted by the seller. The buyer’s mortgage lender or broker may order the appraisal on their behalf, though the buyer is typically expected to pay for it out of pocket. On average, a home appraisal for a single-family property runs between $300 and $450 while appraisals for multi-family homes can start at around $500.

Once the appraisal is ordered, the appraiser will schedule a time to visit the property. The appraiser will then conduct a thorough review of the interior and exterior of the home to determine what it’s worth. This may require them to take measurements or photos of the property. Appraisals can take a few minutes to a few hours to complete, depending on the details of the home and the appraiser’s methods.

After visiting the home, the appraiser will use the information they’ve collected to create a reasonable estimate for the home’s value. At this stage, the appraiser will also look at the values of comparable homes in the area. Using these comps and what they’ve learned from visiting the home, the appraiser will prepare an appraisal report that includes a figure that represents their perceived value of the home.

A copy of this appraisal report is then shared with the buyer and the buyer’s mortgage lender. It can take anywhere from a week to 10 days for the report to be completed. Sellers can also request a copy of the report.

If a buyer disagrees with the appraisal report, they can request a reconsideration from the lender or opt to pay for a second appraisal.

How To Improve Your Home’s Appraisal Value

The appraisal process is meant to be objective, but appraisers are human. Good curb appeal and clean, uncluttered rooms send a message of a well-maintained home. And they can be achieved without a great deal of time or expense. There are some easy ways to quickly improve the appraised value of your home:

• Lean and uncluttered rooms convey the message that a home is well-maintained.
• Minor cosmetic improvements can make a big difference.
• Point out any major improvements you’ve made to the appraiser, in case they miss them.

On the other hand, you should avoid big expensive improvements just for the sake of increasing your home’s appraisal value. They generally don’t pay off.

Make sure you know your rights as well. If you hire the appraiser to determine your home’s value, the appraisal belongs to you. If you’re refinancing your mortgage and the lender hires the appraiser, the lender is required to provide you with a copy–possibly for a reasonable fee–of the appraisal and any other home value estimates.

If you think the appraiser has the value wrong, first review the written appraisal for errors. Check whether the comps the appraiser chose are reasonably similar to your home. If you still think the price is incorrect, you can appeal the valuation with your lender or ask it to order a second appraisal. 

The Bottom Line

An appraisal is an assessment of the fair market value of a property, business, antique, or even a collectible. Appraisals are used to estimate the value of items that are infrequently traded, and are often rare or unique. The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals can be done for many reasons such as tax purposes when valuing charitable donations, but the most familiar form of appraisal is for a property.

Home appraisals can positively or negatively impact the sale of a house or property, and so are an important part of the process of financing a house. A home appraisal is almost always a requirement when purchasing a home with a mortgage, for example, and if you are refinancing your property your lender may hire their own appraiser to make a valuation of your home.

What Is Asset Allocation?

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon. The three main asset classes—equities, fixed-income, and cash and equivalents—have different levels of risk and return, so each will behave differently over time.

Why Asset Allocation Is Important

There is no simple formula that can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, the selection of individual securities is secondary to the way that assets are allocated in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.

Investors may use different asset allocations for different objectives. Someone who is saving for a new car in the next year, for example, might invest their car savings fund in a very conservative mix of cash, certificates of deposit (CDs), and short-term bonds. An individual who is saving for retirement that may be decades away typically invests the majority of their individual retirement account (IRA) in stocks, since they have a lot of time to ride out the market’s short-term fluctuations. Risk tolerance plays a key factor as well. Someone who is uncomfortable investing in stocks may put their money in a more conservative allocation despite a long-term investment horizon.

Age-Based Asset Allocation

In general, stocks are recommended for holding periods of five years or longer. Cash and money market accounts are appropriate for objectives less than a year away. Bonds fall somewhere in between. In the past, financial advisors have recommended subtracting an investor’s age from 100 to determine what percentage should be invested in stocks. For example, a 40-year-old would be 60% invested in stocks. Variations of the rule recommend subtracting age from 110 or 120, given that the average life expectancy continues to grow. As individuals approach retirement age, portfolios should generally move to a more conservative asset allocation to help protect assets.

Achieving Asset Allocation Through Life-Cycle Funds

Asset-allocation mutual funds, also known as life-cycle, or target-date, funds, are an attempt to provide investors with portfolio structures that address an investor’s age, risk appetite, and investment objectives with an appropriate apportionment of asset classes. However, critics of this approach point out that arriving at a standardized solution for allocating portfolio assets is problematic because individual investors require individual solutions.

The Vanguard Target Retirement 2030 Fund would be an example of a target-date fund. These funds gradually reduce the risk in their portfolios as they near the target date, cutting riskier stocks and adding safer bonds in order to preserve the nest egg. The Vanguard 2030 fund, set up for people expecting to retire between 2028 and 2032, had a 65% stock/35% bond allocation as of Jan. 31, 2022. As 2030 approaches, the fund will gradually shift to a more conservative mix, reflecting the individual’s need for more capital preservation and less risk.

Bottom Line

Most financial professionals will tell you that asset allocation is one of the most important decisions that investors make. In other words, the selection of individual securities is secondary to the way that assets are allocated in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.

What Is the Asset Turnover Ratio?

The asset turnover ratio measures the value of a company’s sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue.

The higher the asset turnover ratio, the more efficient a company is at generating revenue from its assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales.

Formula and Calculation of the Asset Turnover Ratio

Below are the steps as well as the formula for calculating the asset turnover ratio.


$\begin{aligned} &\text{Asset Turnover} = \frac{ \text{Total Sales} }{ \frac { \text{Beginning Assets}\ +\ \text{Ending Assets} }{ 2 } } \\ &\textbf{where:}\\ &\text{Total Sales} = \text{Annual sales total} \\ &\text{Beginning Assets} = \text{Assets at start of year} \\ &\text{Ending Assets} = \text{Assets at end of year} \\ \end{aligned}$​Asset Turnover=2Beginning Assets + Ending Assets​Total Sales​where:Total Sales=Annual sales totalBeginning Assets=Assets at start of yearEnding Assets=Assets at end of year​

The asset turnover ratio uses the value of a company’s assets in the denominator of the formula. To determine the value of a company’s assets, the average value of the assets for the year needs to first be calculated.

1. Locate the value of the company’s assets on the balance sheet as of the start of the year.
2. Locate the ending balance or value of the company’s assets at the end of the year.
3. Add the beginning asset value to the ending value and divide the sum by two, which will provide an average value of the assets for the year.
4. Locate total sales—it could be listed as revenue—on the income statement.
5. Divide total sales or revenue by the average value of the assets for the year.

What the Asset Turnover Ratio Can Tell You

Typically, the asset turnover ratio is calculated on an annual basis. The higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets.

The asset turnover ratio tends to be higher for companies in certain sectors than in others. Retail and consumer staples, for example, have relatively small asset bases but have high sales volume—thus, they have the highest average asset turnover ratio. Conversely, firms in sectors such as utilities and real estate have large asset bases and low asset turnover.

Since this ratio can vary widely from one industry to the next, comparing the asset turnover ratios of a retail company and a telecommunications company would not be very productive. Comparisons are only meaningful when they are made for different companies within the same sector.

Example of How to Use the Asset Turnover Ratio

Let’s calculate the asset turnover ratio for four companies in the retail and telecommunication-utilities sectors for FY 2020—Walmart Inc. (WMT), Target Corporation (TGT), AT&T Inc. (T), and Verizon Communications Inc. (VZ).

What Is an Audit?

The term audit usually refers to a financial statement audit. A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent. The audit can be conducted internally by employees of the organization or externally by an outside Certified Public Accountant (CPA) firm.

Understanding Audits

Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud. As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls.

Standards for external audits performed in the United States, called the generally accepted auditing standards (GAAS), are set out by Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA). Additional rules for the audits of publicly traded companies are made by the Public Company Accounting Oversight Board (PCAOB), which was established as a result of SOX in 2002. A separate set of international standards, called the International Standards on Auditing (ISA), were set up by the International Auditing and Assurance Standards Board (IAASB).

Types of Audits

External Audits

Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, auditor’s opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.

External auditors follow a set of standards different from that of the company or organization hiring them to do the work. The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor’s opinion expressed on items being audited (a company’s financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company.

Internal Audits

Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards. These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations.

The results of the internal audit are used to make managerial changes and improvements to internal controls. The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

Internal Revenue Service (IRS) Audits

The Internal Revenue Service (IRS) also routinely performs audits to verify the accuracy of a taxpayer’s return and specific transactions. When the IRS audits a person or company, it usually carries a negative connotation and is seen as evidence of some type of wrongdoing by the taxpayer. However, being selected for an audit is not necessarily indicative of any wrongdoing.

IRS audit selection is usually made by random statistical formulas that analyze a taxpayer’s return and compare it to similar returns. A taxpayer may also be selected for an audit if they have any dealings with another person or company who was found to have tax errors on their audit.

There are three possible IRS audit outcomes available: no change to the tax return, a change that is accepted by the taxpayer, or a change that the taxpayer disagrees with. If the change is accepted, the taxpayer may owe additional taxes or penalties. If the taxpayer disagrees, there is a process to follow that may include mediation or an appeal.