Appraised Value vs Market Value: What Every Homebuyer Should Know

The median home asking price for four weeks ending on September 24th, 2023 is $387,350. Appraised value vs market value take this value into consideration to understand the market fluctuations while pricing your home.

A professional appraiser calculates the appraised value. Hired by a mortgage lender to determine the mortgage amount you receive. The costs of an appraisal were around $313-$421, while the single-family home average was $350.

Market Value or Fair Market Value (FMV) is calculated based on comparable sales, supply and demand, and economic conditions. You can also do it at home for free using a price-by sq/ft estimator to not overpay for a property.

What Is Appraised Value?

An appraised value is the financial estimate of your home. The process is called a home appraisal and is done by an appraiser. For you, the appraised value meaning is important as it influences the valuation of a property for a mortgage lender.

You require an appraisal for two purposes. Firstly the bank for a mortgage and then the government for property tax. So, here are the types of house appraisal values and their difference from market value:

Bank Appraisal vs Market Value

Banks require appraisals when they grant mortgages. It differs from market value assessments in several ways, such as:

• Purpose: Bank appraisals aim to assess property value for lending purposes. To ensure the loan amount is equal to the property’s worth. In contrast, market value reflects the amount a home buyer and seller use in a transaction.
• Criteria: Bank appraisals focus on property condition, location, and recent home sales data. Besides market value considers a broader range of factors from supply and demand to economic conditions.
• Independence: Bank-appraised values can be influenced by the lender’s interests. Chiefly, market value is more objective as it represents the property’s true value in the real estate market.

Tax Appraisal vs Market Value

Local governments conduct tax appraisals to determine property tax assessments. An assessed value vs market value assessment differs in several crucial ways such as:

• Objective: Tax appraisals primarily aim to calculate property taxes, whereas market value assessments aim to establish the property’s actual worth.
• Frequency: Tax appraised value of a home is often performed annually or once in two years. Whereas, market value fluctuates often due to real estate market dynamics.
• Criteria: Tax appraisals depend on simplified valuation methods, such as assessing property values based on neighborhood averages. Market value takes a broader approach, such as specific property features and current market state.

What Is Fair Market Value (FMV)?

FMV influences the final transaction of a property for a buyer and seller. To understand FMV’s meaning, let’s explore the key factors that influence it and why market value is crucial.

Factors Affecting Market Value

Several factors come into play to determine the market value of a property, they primarily are:

1. Location: Properties in desirable neighborhoods with great amenities are likely to have higher market values.
2. Condition: The visible state of the property matters. Well-maintained homes and buildings explicitly command higher market values.
3. Comparable Sales: Recent sales of similar properties in your neighborhood impact market value. These sales also serve as a basis for your pricing.
4. Economic Conditions: Economic factors, such as job opportunities, income levels, and interest rates, affect real estate values.
5. Supply and Demand: When there’s a high demand for properties but the supply is limited, market values are likely to rise. Contrarily, an oversupply leads to lower values.
6. Property Size and Features: The size of the property and its unique features can influence market value. For instance, properties with additional bedrooms or special amenities have higher values.

Importance of Market Value

You can understand the importance via the various stakeholders that rely on market value below:

1. Sellers: Market value helps sellers set competitive listing prices. Primarily, to invite potential buyers and at the same time maximize returns.
2. Buyers: Buyers rely on market value assessments to make informed decisions and not overpay for a property.
3. Lenders: Lenders use market value to determine the loan-to-value ratio, which impacts loan approvals and interest rates.
4. Investors: Real estate investors depend on market value to assess potential returns on their investments and make strategic decisions.
5. Property Taxes: Local governments often use market value as a basis for property tax assessments.
6. Insurance: To ensure valid coverage for property owners, insurance companies consider the market value to calculate premiums.

Market Value vs. Appraised Value

It is important for everyone involved in real estate transactions to understand the difference. From buyers and sellers to lenders and appraisers.

What Happens When the Appraisal Value vs Market Value Differ?

When these values don’t align, the scenarios that can occur are:

• Seller’s Advantage: If the appraised value is higher, it benefits the seller. Given that they can potentially list the property at a higher price, to maximize profit.
• Buyer’s Advantage: Surely, a lower appraised value can work in favor of the buyer. It allows them to negotiate a lower purchase price.
• Loan Amount Difference: Lenders usually base loans on the appraised value. If it’s lower than the agreed sale price, the buyer may need to cover the difference or renegotiate terms.
• Renegotiation: In cases of major misconceptions, buyers and sellers may renegotiate the sale price. They can find a middle ground, or, in extreme cases, cancel the deal.

How to Improve Your Property Appraisal Value?

To enhance a property’s appraised value, consider these strategies:

• Maintenance: Regular maintenance improves a property’s condition, which positively influences its appraised value.
• Renovations: Well-planned renovations can increase a property’s value. So, focus on projects that offer a good return on investment.
• Curb Appeal: A well-landscaped and attractive exterior can create a positive first impression, with the potential to raise the appraised value.
• Comparables: The appraiser should be provided with information on recent comparable sales in the area to ensure a fair assessment.
• Documentation: Document any improvements made to the property. This proof can support a higher appraised value.

It is essential to understand how valuation discrepancies impact real estate transactions. Nonetheless, improving appraised value can be beneficial for sellers looking to maximize their property’s worth.