Understanding Market Value vs. Appraised Value
When buying or selling a home, two terms you’ll hear frequently are market value and appraised value. While they may sound similar, these figures are determined in very different ways and both play crucial roles in real estate transactions. Knowing the difference between market value and appraised value can help you make informed decisions, avoid surprises during the buying or selling process, and feel more confident when negotiating a home’s price.
What Is Market Value?
Market value is the price that a home would likely sell for in the current real estate market. It’s essentially what a willing buyer is ready to pay and what a willing seller is ready to accept under normal conditions. Market value is influenced by factors such as:
- Location: Homes in neighborhoods with good schools, low crime rates, and access to amenities generally have higher market values.
- Comparable Sales: Real estate agents look at recent sales of similar homes (often called “comps”) in the same area to determine what the market suggests your home is worth.
- Current Market Conditions: Supply and demand play a major role. In a seller’s market—when there are more buyers than available homes—market values tend to rise. In a buyer’s market, prices often stabilize or decline.
- Property Features: Upgrades, renovations, square footage, and lot size all impact what buyers are willing to pay.
Because it reflects current demand and competition, market value can fluctuate more quickly than appraised value. It’s essentially a snapshot of what the home is worth at a given moment in time, based on the opinions and behaviors of real buyers in the marketplace.
What Is Appraised Value?
Appraised value, on the other hand, is determined by a professional appraiser, someone who is licensed and trained to provide an unbiased opinion of a property’s value. Lenders typically require an appraisal during the home-buying process to make sure the amount being borrowed is appropriate for the property’s actual worth.
An appraiser will conduct an inspection of the home and consider factors such as:
- Property Condition: The appraiser notes the home’s overall condition, including structural integrity, maintenance, and any necessary repairs.
- Recent Comparable Sales: Like real estate agents, appraisers also rely on comps, but their analysis tends to be more conservative and formula-based.
- Square Footage and Layout: Larger homes or those with functional layouts generally appraise higher.
- Location and Market Trends: Appraisers take into account neighborhood desirability and broader market trends in the area.
The final appraised value is a professional estimate used primarily for financing purposes. It provides a safeguard for lenders, ensuring they don’t lend more than the property is actually worth.
Market Value and Appraised Value
Although both values describe how much a property is worth, they’re determined differently and can vary from one another. Here are a few important distinctions:
- Who Determines the Value:
- Market value is determined by the collective actions of buyers and sellers in the marketplace.
- Appraised value is determined by a licensed appraiser following a specific set of guidelines.
- Purpose:
- Market value is used for pricing, marketing, and negotiation.
- Appraised value is used to satisfy lending requirements and assess risk for the mortgage company.
- Timing and Sensitivity:
- Market value can shift quickly with economic conditions, interest rates, or local demand.
- Appraised value tends to lag slightly behind since it relies on closed sales, which represent past data.
- Potential for Discrepancy:
- It’s not uncommon for a home’s market value and appraised value to differ. For example, if buyers are competing for limited inventory, they might offer more than the appraised value. Conversely, if the market slows, an appraisal might come in higher than what buyers are willing to pay.
What Happens If the Appraised Value Is Lower Than the Market Value?
A low appraisal can create complications during the home-buying process. If the appraised value comes in lower than the agreed-upon purchase price, lenders typically will not approve the full loan amount. This leaves buyers with a few options:
- Renegotiate the Price: The buyer and seller may agree to lower the price to match the appraisal.
- Make Up the Difference: The buyer may choose to pay the difference out of pocket.
- Challenge the Appraisal: If there are errors or overlooked comps, the appraisal can be disputed.
- Walk Away: In some cases, buyers may have the right to back out of the deal if the appraisal is too low.
Sellers, on the other hand, can take steps to help their home appraise at a higher value, such as completing minor repairs, improving curb appeal, and keeping records of upgrades or renovations to show the appraiser.
Why Understanding Both Matters
Both market value and appraised value are critical for anyone a part of the real estate transaction. For buyers, understanding these numbers helps ensure you’re making a sound investment and not overpaying. For sellers, knowing the difference can help you price your home appropriately and navigate the appraisal process more smoothly once you’re under contract.
When both values align closely, it’s a good sign that the home is priced fairly and reflects the true conditions of the market. However, when there’s a gap, it’s important to work with a real estate professional who can help you interpret the situation and decide on the best course of action.
Work with a Trusted Expert
Navigating the balance between market value and appraised value can be tricky, but that’s where having an experienced realtor makes all the difference. Mahdi Salarfar with the Alpha Realty Team has knowledge of the local market and knows how to price, market, and negotiate effectively based on both market trends and appraisal realities. Whether you’re buying your first home or selling your current one, Mahdi can guide you every step of the way to ensure you make confident, informed real estate decisions.
