If you’re looking into buying or selling a home, you’ve likely come across the terms “market value” and “appraised value.” Although similar, the differences can have far-reaching consequences. In this article, we’ll clarify the differences and explain how they can affect a real estate deal.
If you own a home, trying to place a precise value on it can be difficult to wrap your head around: it’s a place you’ve likely spent a good chunk of your life, perhaps it’s your first house, or maybe it’s where you raised your kids. No matter what your personal connection to your home may be, trying to put a number on something so priceless can be a difficult feat indeed.
As it turns out, placing a value on a home is a difficult task even when all those personal factors are taken out of the equation. The value of a home is always a moving target: the buyer and seller may agree on one value, but the buyer’s mortgage lender could disagree entirely.
So, when it comes time to sell your home or to buy a new one, how can you make sense of it all? Well, there are two major valuations you’ll need to know: the home’s market value and the home’s appraisal value.
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Market Value vs Appraised Value
The main difference between a home’s market value and appraisal value is who determines it: market values are decided by buyers and sellers, while appraisal values are calculated by licensed appraisers.
When thinking about a home’s market value, it’s important to fully realize that the real estate market is a market. Just like in a traditional market or a bazaar, buyers and sellers go toe to toe with each other, hashing out the price and negotiating a deal. The market value is whatever price the buyer and seller agree on.
Let’s imagine you want to sell your house for $300,000, but a buyer only wants to pay $200,000. After negotiating, the buyer agrees to pay $250,000 and the seller agrees to accept that payment. At this point, it’s determined that the market value of the home is $250,000.
Until the deal actually closes, the true market value of the home in its purest form remains unknown. However, that doesn’t mean that you can’t estimate it — real estate agents usually do this at the beginning of the selling process.
For the most part, when people talk about a home’s market value, this is what they’re referring to: the price that a home seller can reasonably expect to procure for his or her home. Real estate agents will assess this by performing a comparative market analysis, and homeowners can also get a good idea of it by using various online valuation tools.
In a comparative market analysis, a real estate agent will compare a home to other houses that were recently sold or listed in the area to derive a competitive price. Online market value estimators will usually do something similar, but will often run these numbers through an algorithm to come up with the final figure.
In summary: market value is technically whatever a buyer and seller agree the property is worth, but when most people talk about market value, they’re likely referring to the estimate of this value that a real estate agent or estimator tool will make.
The appraisal value of a home is determined by a licensed home appraiser. When a buyer attempts to secure a mortgage, they’ll need to have the property appraised. The lender will use this value to decide how much they’re willing to lend.
The process of appraising a home is fairly similar to a comparative market analysis: an appraiser will look at other similar houses in order to arrive at the home’s valuation. They’ll also factor in a number of other relevant points such as recent home improvements, curb appeal, the surrounding neighborhood, and the general market conditions in the region. However, while pretty much anyone can do a comparative market analysis, appraisals can only be performed by a licensed appraiser.
While current homeowners can hire an appraiser at any time to get a better idea of what their house is worth, appraisals are usually initiated by a bank when a buyer is attempting to secure a mortgage. Banks want to have homes appraised to make sure that the amount they’re lending out is reasonable.
In short: the appraisal value of a home is whatever an appraiser determines the house is worth. It’s not up for negotiation like the market value is. Different appraisers may come up with slightly different figures, but they usually won’t be too disparate.
What Happens if the Appraised and Market Values Are Different?
In some cases, a home’s market value and appraised value will be different. This is because markets can be inefficient: buyers and sellers agree on prices that are not necessarily in line with the real value of the item in question.
Why does this happen? Perhaps a homeowner had their house appraised at $300,000, but they’re currently dealing with a personal situation that requires them to sell their home quickly. In such a scenario, the homeowner may be willing to lower the price significantly below its value to get the house off their hands as soon as possible.
In other cases, the seller may be great at negotiating and will be able to get the buyer to agree to a much higher price than the house is actually worth. When this happens, the buyer can often encounter difficulty getting their mortgage: if an appraiser deems the house worth $300,000, but a buyer agrees to purchase it for $350,000, the bank may decline to lend the full amount to the buyer. This is because the house would not serve as sufficient collateral to the bank’s loan.
In situations like these, the deal can fall through if the buyer is unable or unwilling to pay the difference in cash. However, the buyer and seller are also free to negotiate a lower price that will fall in line with what the buyer’s bank is willing to lend out.
All in all, market value and appraised value are two different ways of determining the value of a house. A home may be priceless, but the house itself has a specific value.
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