Appraisal Value vs Market Value

What is an Appraisal?

An appraisal is a written document estimating a property’s value. A professional appraiser conducts a complete evaluation of the property to determine the home value based on comparable properties and market conditions. An appraisal is an important tool used in real estate during the home-buying process.

How Appraisals are Conducted

An appraisal includes a professional property inspection and comparative market analysis. The appraiser’s specific methodology can further influence the property’s assessed value. Appraisal reports also list the appraiser’s methodology and explain, in detail, how they determined the fair market value.

Factors Considered in an Appraisal

A licensed appraiser considers various factors to determine a property’s value. The different aspects included in an appraisal are size, condition, location, and the number of bedrooms and bathrooms. 

When determining the property value, the appraiser may also consider outdoor amenities and curb appeal. An appraisal also considers the recent sale of similar properties and current market trends. 

What is Market Value?

Market value refers to the proposed property value in an ideal real estate market. Essentially, the market value is the price potential buyers are willing to pay for a property. The market value of a real estate property fluctuates rapidly based on seller inventory and buyer demand. 

Market values may also vary depending on the market conditions in a specific location. This value doesn’t impact property tax.

Influences on Market Value

Many factors, including buyer demand, economic conditions, interest rates, current market conditions, and property features, may influence market value. 

For example, a market with more buyers than sellers creates a seller’s-market. The increased buyer demand can drive up the market value of a home simply due to the increased competition. In markets with fewer buyers, the value can decrease.

Economic conditions and interest rates can also influence market value. What happens in a recession to house prices? Federal and local governments’ influence on property taxes may impact the property’s market value trends. Likewise, many people will want to purchase a house cheaper if they must pay higher property taxes. 

Appraisal Value vs. Market Value: Key Differences

Here are a few key differences between appraisal value and market value.

Purpose and Perspective

The intended purpose and perspective of appraised and market value differ. Appraisal value is a professional evaluation of a property often used by lenders. Market value is more commonly used by sellers when determining a fair list price and buyers when deciding how much to offer for the property.

Objectivity vs. Subjectivity

Whereas an appraisal aims for objectivity, market value is more subjective. The appraised value is based on calculatable factors, such as recently sold properties and the home’s condition. Market value, however, is based on more emotional appeal, such as a more competitive housing market.

Time Sensitivity

A property appraisal shows a more accurate, extended portrait of the real property value, whereas market value fluctuates more rapidly. A home’s list price may not always match the actual market value, but a sudden influx of buyers could encourage higher offers. 

A homeowner aiming to determine a fair price should consider both appraised and market values. If you’re not sure where to start, consider these tips on how to price a house for sale.

When Appraisal Value and Market Value Differ

Because appraised value vs market value are different concepts, the same home can have different evaluations for each. Here are a few scenarios in which the estimated value of a property may differ.

Appraised Value Below Market Value

Buyer demand drives up a home’s market value, which could lead to a lower appraised value than current market values. A single seller may receive numerous offers in a competitive housing market, resulting in a bidding war on a house. However, increased demand does not always mean the property’s assessed value also increases.

Unique property features could also increase or lower an appraisal value. Specific home features like an in-law suite or outdoor kitchen may appeal to some buyers. However, the addition of these amenities may not increase the property’s appraised value. 

Additionally, without comparable properties with the same amenities, an appraiser provides an estimate of their pricing contribution, which may or may not be accurate.

Of course, there’s also the potential for appraisal errors.  The appraiser relies on a series of data points to create the appraisal report. Miscalculating the square footage, failing to account for property renovations, skipping over necessary repairs, or not using comparable homes could all lead to a miscalculated appraisal.

Appraisal Above Market Value

It’s also possible for appraised values to be higher than market values. Appraisals are time-sensitive, meaning they may be out-of-date within a few months, especially in rapidly appreciating markets. Property values based on market trends are often different than appraisal values. 

Seller repairs or renovations can also increase the current market value, especially before an updated appraisal has been completed. Finally, few available buyers can decrease a home’s market value, even when the appraisal values are higher.

Implications for Home Sellers

It’s important to understand the implications of appraised value vs market value as a seller. Here are a few key things to know.

Impact on Financing and Sales

Whereas many real estate professionals and sellers use market trends to determine the listing price, lenders more commonly use the appraised value. The mortgage lender will typically only lend up to a percentage of the home’s assessed value based on the appraisal report.  Additionally, buyers may only be able to negotiate up to the approved mortgage loan amount.

Challenges When Assessed Value is Below Market Value

Sellers and buyers may need to renegotiate the purchase price when the bank appraisal is lower than the agreed-upon purchase price. The buyer may request that the seller reduce the price to match the assessed value. If the seller insists on the current price, they may need to back out of the deal and find a new buyer.

This can present a unique challenge to some sellers, especially those who need to sell their property for a certain price to pay off an existing mortgage.

Selling to a Cash Home Buyer

Selling to a cash home buyer offers many benefits, including avoiding the inconvenience of appraisals and inspections.

Overcoming Appraisal Challenges

One of the best solutions for appraisal issues is a cash buyer. Because cash buyers don’t rely on a loan, they’re not bound by the appraisal report. When it comes to market value vs appraised value, the market value is what’s possible in an open market. However, securing a qualified buyer can still be a challenge.

Benefits of a Cash Offer

Selling to a cash buyer offers other benefits, including a faster closing process and more control over the real estate transaction. Sellers can choose their closing date without waiting for appraisals or inspections. A cash sale also allows you to skip repairs and renovations.

Contact A-List Properties today at (972) 526-7042 to sell your home for cash, or use our online form to learn more. Our team aims to help you sell your house fast without the inconveniences of a traditional sale.