Home Appraisal Value vs Market Value

How is the value of a house determined? Who decides how much a house is worth? These are two of the most common questions people have when they are trying to buy or sell a house. Finding out what a property is valued at is important to know for a variety of reasons. There are two main types of value that are placed on a property — market value and appraised value. Both types of value are integral to determining the value of a property, but they are not the same. Here’s the difference between home appraisal value vs market value.

What is an Appraisal?

Every property bought with a mortgage is required by the lender to have an appraisal. An appraisal is when a licensed professional examines a property and determines the current market value.

This current market value is based on a number of factors including recent sales of comparable properties, the overall condition of the property, and square footage.

The purpose of an appraisal is to prevent the lender from giving away more funding than needed. They minimize the risk of lending out money for a property by making sure that the property is worth at least as much as the loan. A lender can’t lend more than the appraiser’s property valuation.

Appraised or Assessed Value

The appraised value is what the mortgage lender uses to determine how much they are willing to loan you, and the assessed value is used by local tax officials to calculate your property tax. Depending on where the property is, a local tax assessor will examine the property and calculate the property taxes based on the assessed value.

What is Market Value?

The market value is the price that the buyer and seller agree upon for a property. In other words, it is the price the property was sold at. The market value for a home is only determined once the real estate transaction is finalized at closing. For example, if a seller listed their home for $500,000 and a buyer negotiates it down to $450,000, then the market value of the property would be $450,000.

Even though the market value is determined at closing, that doesn’t mean that a potential buyer can’t estimate the market value of properties beforehand. Many times when home buyers are discussing market value they are actually talking about the estimated value that comes from comparative market analysis or CMA.

CMA is the process of real estate agents comparing recently sold properties that are similar to the property being looked at and using those sale prices to estimate what the current market value might be. Zillow, Redfin, and other online estimation tools use comparative market analysis to generate home value estimates that you often see on listings.

Market Value is Different From Fair Market Value

Market value should not be confused with fair market value. The two terms may sound similar but they have different meanings and very different implications. Fair market value is the price offered for a property when the buyer is knowledgeable, rational, and under no pressure to buy. In other words, it’s the price that would be agreed upon with no external factors influencing the sale. Real estate agents use fair market value to make estimated ranges for what they think a property could sell for. This is different from market value, which is the actual price that the property sells for.

Home Appraisal Value vs Market Value

There are times when the home appraisal value and the market value differ. The home appraisal value may be higher or lower than the market value. However, if the appraisal is significantly lower than the market value, it can be problematic.

The purchase price is typically the starting point for negotiation but doesn’t reflect the property’s appraisal value. If the appraisal value comes in lower than the purchase price, the buyer and seller will have to renegotiate the deal or come up with extra cash to make up the difference. In some cases, the deal may even fall through completely. If the appraisal comes in higher than the purchase price, nothing changes and the buyer has simply agreed to pay below the appraisal value for the property.

For example, let’s say a home is listed for sale at $500,000. After some negotiation, the buyer and seller agree on a purchase price of $480,000. The buyer then gets the home appraised and the appraisal comes back at $450,000. Unless the seller reduces the price to match the appraisal value, the buyer will have to make up the difference another way. If the buyer still wants to buy the house, the appraisal value would be $450,000 and the market value would be $480,000.

An alternative example could be a home that’s listed for sale at $500,000 but the buyer gets it appraised and the appraisal value comes back at $520,000. If the seller decides to keep the price at $500,000, then that would be the market value and the appraised value would be $520,000.

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