What Is Appraised Value?
The appraised value is an assessment of a property's worth determined by a licensed appraiser. This value is based on an in-depth analysis of the property and is often used by lenders to determine the amount of money they are willing to lend for a mortgage.
Before closing on a house, your mortgage lender will likely require an additional third-party appraisal to ensure that their investment is safe. They do not want to provide a loan for a house that is extremely overpriced and potentially lose their investment.
The closing appraisal can be intimidating. At this stage of the process, you are pretty much set and determined to buy this house. If the appraisal comes in way over or way under the agreed-upon price, you may have to return to the negotiating table. However, most of the time those problems are avoided and evaluations are pretty similar across the board.
What Is Fair Market Value?
The market value is the price a property is likely to sell for in the current market conditions. It represents what a buyer is willing to pay and what a seller is willing to accept in an open and competitive market.
Since the market value is flexible, a good way to think of the market value is to consider closing prices. What would you pay for this house?
Fair market value is determined by a few factors. It considers the property itself - size, location, and quality. It also considers pricing of similar homes as does an appraisal. Fair market value also takes into account the surrounding area and market trends. This makes fair market valuations more vulnerable to ups and downs in the real estate market and economy as a whole.
A fair market valuation is part of a comparative market analysis. Anyone with an understanding of the local market can provide an analysis. Real estate agents or brokers can help or point you in the right direction.
Is Market Value the Same as Appraised Value?
In theory, fair market value and appraised value should come out to be about the same, but in practice, that is not always the case. This is because the appraisal value is an estimate determined by an appraisal, while the market value refers to the value the home would sell for on the open market.
Let’s take a close look at what is the difference between the appraised value and market value.
Appaised Value vs Market Value Key Differences
1. Purpose
- Appraised Value: Primarily used by lenders for mortgage approvals and by tax assessors.
- Market Value: Used by buyers and sellers to determine the appropriate price for a property.
2. Determining Factors
- Appraised Value: Based on objective criteria and professional judgment of the appraiser.
- Market Value: Influenced by market dynamics, buyer and seller sentiment, and competitive factors.
3. Stability
- Appraised Value: Tends to be more stable and based on historical data and comparable sales.
- Market Value: Can fluctuate more based on current market conditions and trends.
4. Impact on Transactions
- Appraised Value: Can affect the loan amount a buyer can secure and may impact the ability to close a deal if it is significantly lower than the agreed purchase price.
- Market Value: Directly influences the listing price, offers, and final sale price of a property.
How Is Appraised Value Calculated?
An appraiser considers multiple aspects when compiling his or her appraisal report. First, they need to complete a home inspection. This is a thorough inspection of the house inside and out. They look for things such as:
- Housing Dimensions
- Number and purpose of rooms (i.e. bedrooms, bathrooms, and kitchens)
- Structural integrity
- Included utilities, appliances, and amenities
- Condition of walls, stairs, floors, doors, ceilings,
- Health and safety regulations
- Code compliance
- Age and location
- Condition of gutters, roofing, siding, windows, porch
- Parking and garage
- Neighborhood details
Once they have the details that they need, they compare the home to other similar homes that recently sold. They try to find homes nearby with similar qualities, but if not then they slowly expand outward. Computer software makes this a reasonably quick process.
Then, the appraiser spends a few hours compiling all the data into a 10 or so page report. The report includes the appraisal value and the logic behind the appraiser’s estimation. Most valuations consider one or more of the following cost strategies: cost approach, income approach, and comparison.
Should I Get an Appraisal?
Getting an appraisal is a smart option whether you are on the buyer or seller side of the equation. As a seller, an appraisal helps you establish a listing price and ensures that you are not going to run into problems with prospective buyers in the future. You will know that your agreed-upon price will likely secure mortgage funding for your buyer. This makes the entire closing process quick.
As a buyer, as mentioned above, you will likely be required to get an appraisal before closing. If you are not required to or you decide to pay for the house in full or with alternative sourcing, an appraisal can still help protect your investment. You do not want to overpay for your dream house.
Is the Appraisal Value or Fair Market Value More Important?
Both fair market value and appraised value are important during the home buying process. However, it would not be fair to compare the two as they each have a different purpose.
Fair market valuations are typically used so the seller knows where to start their listing price. A higher fair market value is good for the seller as it means that they will get more money from sale. A lower value means the house might sell below what the seller was originally hoping for.
An appraisal is a more comprehensive valuation. These two numbers can vary, but ideally they end up pretty similar. During the negotiating process, the market valuation will essentially be the agreed upon price. The appraisal will estimate to what degree that market value is correct.
If you are planning to get a mortgage as most people do, an appraisal is typically required by the lender before you can close. If you agree on a price of $200,000 but the appraisal comes in at $150,000 then something is clearly off. A lender will not provide funds with such a discrepancy and you will likely have to renegotiate a lower price.
Can a House Be Sold For More Than the Appraised Value?
Usually, the listing price for a home will start off higher than appraised value or market value. Sellers are trying to find serious offers and make money in the process. They will usually come down a bit closer to the market value. But can a house be sold for more than the appraisal?
A low appraisal can result from a variety of issues. Negative market trends such as a buyers market can lower the appraisal. Poor and inexperienced evaluation strategies, inaccurate comparables, or incomplete data can lower the appraisal value as well.
If you require a mortgage then it will be difficult to agree on a rate that is significantly over the appraisal value. In the example above, a $50,000 difference will clearly raise some red flags for the lender. A smaller difference - something closer to $5,000 or even $10,000 - might pass through.
Should You Pay More Than the Appraisal Value?
If you get an appraisal that is under the agreed-upon price, meaning you will pay more than that house is worth, should you still pay? There are a few things to consider here. First, if the appraisal was requested by your lender, you may not have an option. If the difference is too big you might have to renegotiate to find terms the lender will agree with or find a new lender.
But if the lender is okay with the difference - let’s imagine there is a $5,000 difference - should you still pay? That answer depends on how much you want the house, which direction the local market is trending, or what the seller is willing to do to make up the difference.
One thing you should do if the appraisal is under the agreed-upon price, especially by a large amount, is to find out why. Is there a serious problem that you were unaware of? Or a major change in the market? This can help influence your decision as well.
Should You Pay Under Appraisal Value?
If the appraisal comes in below the agreed-upon price and the seller is committed to selling, you just found a good deal! However, the seller may decide to back out and negotiate for a higher price. To avoid this, as the buyer you can increase the price to make up for the difference. So, if the appraisal is $10,000 below the agreed-upon price, you can increase the price up to $10,000 to make the seller happy and keep the agreement alive.
If you feel that the appraisal was off, you can appeal or get a different appraisal. If the new appraisal is on target, you will be set. But if not, you will have to go back to the drawing board.
Appraised Value vs. Fair Market Value Bottom Line
Understanding the distinction between appraised value and market value is essential for making informed real estate decisions. While the appraised value is a professional assessment used mainly for lending purposes, the market value reflects the current market conditions and is critical for pricing and negotiating property sales. Both values play a crucial role in the real estate transaction process, and being aware of their differences can help buyers, sellers, and investors navigate the market more effectively.