In the real estate world, you’ll often hear mention of the terms “appraisal value” and “market value,” sometimes used synonymously. A property’s market value is the price it is most likely to sell for on the current open market, while a property’s appraised value is an official determination of its worth by a licensed appraiser.
On top of these terms, you’re likely to come across other value-based terms, such as “fair market value,” “assessed value,” and “sales price.” While all these prices may line up, they often don’t; they can even vary by tens of thousands of dollars.
In this article, we’ll help you understand the nuances among these terms, how the values are set, and what to do when the numbers don’t align.
Not sure what your house is worth? One of the best ways to determine value is to have an experienced local real estate agent provide a comparative market analysis, or CMA. Clever can introduce you to agents in your neighborhood who are actively selling homes, your very best source for a CMA. Take a short quiz to get started!
Market value
The market value of a home is the likely price a property will sell for, representing the consensus between what a buyer is willing to pay and what the seller is willing to accept. It is based on a variety of conditions, such as supply and demand, comparable sales (known as “comps”) in the area, the state of the economy, and other factors.
Market value is not the same as online home value estimates, like Zillow’s Zestimate or Redfin’s estimator. These estimates are generated by an automated valuation model (AVM), an approach that uses public and proprietary information, historical sales in the area, and other data points to algorithmically determine an approximate value. Online estimates are helpful in the early stages of buying or selling, but they can’t factor in everything, such as the home’s specific condition or other nuances.
🤝 Who determines market value?
Buyers and sellers set market values for a specific property collectively.
Traditional markets or bazaars of old are made up of buyers and sellers exchanging goods and services. In the real estate market, homes and apartments are the goods being traded, and the market value of a particular property is whatever price the buyer and seller agree on.
Aside from buyers and sellers, other real estate players work with market values in their jobs. For example, real estate agents may guide clients on what a home’s market value should be by assessing demand, inventory, comps, and more.
🧮 How market value is calculated
A comparative market analysis (CMA) from a real estate agent is the most common method for determining a home’s market value. This report compares recent sales prices of properties with similar features (e.g., bedrooms, square footage, age, lot size) in the same area.
Market value can also be influenced by larger factors, such as the overall state of the economy.
For instance, when supply and demand start to have an imbalance, you may hear references to a “buyer’s market” or a “seller’s market.” These terms generally refer to conditions that are more favorable for one side or the other based on inventory, current demand, interest rates, and other factors.
Appraised value
An appraisal value is the professional assessment of a property’s worth by a certified professional. A licensed appraiser will perform the various steps of the appraisal process and finalize their findings in an appraisal report.
Typically, appraisals tend to err on the conservative side as banks want to minimize lending risk.
🏦 When do you need a home appraisal?
Mortgage lenders will order a home appraisal during the mortgage loan application process to understand what the property is worth. It also ensures the buyer isn’t overpaying significantly.
Lenders will also require a home appraisal when an owner seeks refinancing or a home equity loan.
Some homeowners might also want to get an appraisal for private reasons — for example, when determining asset distribution in divorce proceedings or for estate planning purposes.
📋 What do appraisers look at?
Appraisers will look at a variety of factors before reaching their value determination, such as:
- The home’s location
- The size of the lot
- Square footage
- Number of bathrooms and bedrooms
- Property’s age
Additionally, they’ll consider everything from build quality and home improvements to signs of damage and other potential causes for concern.
All appraisals must adhere to the standards outlined in the Uniform Standards of Professional Appraisal Practice (USPAP). Each state sets specific education, exam, and experience qualifications for appraisers to become licensed; licenses may also differ by level and for different types of properties (e.g., residential or commercial).
Appraised value vs. market value vs. assessed value
Understanding the differences between these three types of value and how they’re used is important for both current and future homeowners to successfully navigate the real estate market. Often incorrectly used as synonyms, these value types serve different purposes, are determined by different parties, and vary in their calculation approaches.
An assessed value is assigned to a property by a local tax assessor to determine the amount of property taxes owed. These assessors take into account similar factors (location, comps, and property characteristics) and then consider the property’s market value.
It’s worth noting that in some jurisdictions (like in much of New York State), an assessed value is often based on a percentage of a home’s market value (this percentage is set uniformly throughout the given city or town).
| Value Type | Who Determines It | When It’s Used | Negotiable? | Based On |
|---|---|---|---|---|
| Market | Buyer + seller | Listing and sale | Yes | Supply/demand, comps |
| Appraised | Licensed appraiser | Mortgage, divorce, refi | No | Physical condition, comps, market |
| Assessed | County assessor | Property taxes | No | Tax rates, broad data |
What happens if the appraised and market values are different?
It’s common for the market value and appraisal value to slightly vary, as they are determined by different parties and are not calculated the same way. There are also many other reasons why they may not align.
Let’s say an appraisal values a home at $500,000, but a seller has a personal situation requiring them to sell quickly. The seller might lower the asking price to $400,000 to close on a home faster. In this case, there is a $100,000 disparity between the appraisal and market value.
⚖️ What happens if the appraisal is lower than market value?
Buyers looking to obtain a mortgage on a property where the appraisal value comes in lower than the market value may find they’ll have issues with their lender. This is because mortgage lenders extend loans based on the property’s appraised value.
If this happens, buyers can try a few common options:
- Renegotiate: Ask the seller to lower the sale price to align with the appraised value, or split the difference
- Pay the difference: Buyer may need to cover the gap to close the sale
- Walk away: With an appraisal contingency, buyers can back out of the sale
- Challenge the appraisal: Get a second opinion
In the opposite scenario, where the appraisal value exceeds the market value, buyers are in a great position, as they have “free” instant equity on their home.
💬 Can you challenge an appraisal?
Appraisals can be challenged through a process called “reconsideration of value,” but there needs to be a legitimate reason, such as clear errors in the appraisal.
You may need to provide detailed supportive documentation as you submit your claim, such as home upgrades or additional comps the appraiser hadn’t considered.
Special cases: Divorce, taxes, and refinancing
Appraisal, assessed, and market values are also relevant outside of the home sale context, including:
📂 Divorce
Equitable distribution of assets is a primary principle of divorce proceedings. Courts will often rely on an appraisal to arrive at the property’s fair market value (FMV) and use this value in their calculation of shared assets to divide.
💸 For taxes
Assessed value is used for property tax purposes. Assessed values are often lower than market value, sometimes due to being based on a percentage of market value or because these assessments are done infrequently.
🔁 For refinancing
If you’re looking to refinance your mortgage because interest rates came down or to convert to another loan type, the lender will require an appraisal.
A low appraised value can hurt your chances of getting the refinancing loan or at least the terms you want because it essentially means you have less equity in your home than you might have thought.
One of the most important parts of any successful property transaction is to understand the different valuation types and how each affects your situation. If you’re ready to explore your options, talk to a real estate agent to understand which value matters most in your case and get a free valuation.
FAQs about home valuation
Why is my appraised value higher than market value?
While a similar or higher market value is more common, the appraisal value sometimes comes in higher.
This can be due to the seller wanting to offload quickly or the appraiser determining that something about the property (e.g., location, renovation) is worth more than expected.
What’s the difference between estimated value and market value?
Market value is determined by buyers and sellers: what a buyer will pay, and what a seller will accept.
Estimated value, on the other hand, often refers to online tools and automated valuation models (AVMs) to give an approximation of a property’s value. Estimated values typically only consider major factors and overlook nuanced characteristics, so it’s best used as a directional measurement.
Is appraised value the same as sales price?
No, an appraised value is determined by a licensed appraisal professional, while the sales price may differ significantly.
Sales prices may exceed appraised values, particularly when multiple motivated buyers are interested and engage in a “bidding war.” And sales prices could come in lower than appraised, which is typically the case when sellers want to do away with the property as quickly as possible.
How much over market value should I pay for a house?
As a prospective buyer, you are part of the equation determining market value, along with the seller.
Deciding to pay over the home’s appraised value is not uncommon, especially in seller’s markets. However, speak with your real estate agent to get all the pros and cons before submitting your offer.
How much lower is assessed value than market value?
Assessed value can be equal to (100% of) market value or a (usually lower) percentage of market value, depending on the local government. If a certain jurisdiction assesses homes at, say, 80% of market value, it should mean that all properties in that same jurisdiction will uniformly be assessed at the same percentage of market value.