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Market Value Vs Appraised Value

Market Value Vs Appraised Value

Market value and appraised value are two terms you hear often when discussing real estate and the sale of property. It is important not to get too confused as they reference totally different prices for the same piece of real estate and are used for different purposes. Market value is often used to determine what a home is worth to potential buyers and what it is likely to sell for on the open market. Appraised value is determined by a licensed real estate appraiser and is used primarily for determining whether or not a mortgage should be issued and for what amount. Sometimes these two values match up nicely but more often than not they will diverge for different reasons which may not be known to the home owner or potential buyer.

What is Market Value?

Market value really is a true representation of the free market economy based on supply and demand. At its most fundamental basis market value is determined by the lowest price a seller is willing to accept for a piece of property and the highest price a buyer is willing to pay for that same property. Through the negotiation process when these two parties reach an agreement on a price then that is considered the market value for piece of real estate. Market value also sometimes refers to the price a piece of real estate will sell for in a specific period of time. Some homes in very hot housing markets will sell for inflated prices within weeks and therefore the overall market values for real estate could wind up being higher than their appraised values due to demand. It is also possible that a home is worth more from an appraisal standpoint but eventually sell for less if it is on the market for a substantial period of time like 12 to 18 months. A final interpretation of market value could be what the likely price a particular property will sell for in a competitive marketplace all other factors being equal.

Many variables can affect market value and should be taken into consideration when trying to determine appropriate pricing for real estate. Market value is not what the seller hopes to get for the property but what it eventually sells for at closing. Market value includes both tangible assets such as remodeling and upgrades made to the property as well as location like its proximity to downtown or other areas of interest. Market value can also be affected by the presentation of neighbor properties as well as the quality of the school district in which the residence is a part of. Other factors which can affect market value are the motivation of the buyer and seller, the amount of time the property is been on the market, how much information is available to both parties to make an informed decision and whether or not special incentives are being offered to motivate the sale such as creative financing or any concessions offered and accepted by either party.

What is Appraised Value?

Appraised value takes a more objective approach determining the value of property based on the experience and knowledge of a qualified appraiser. The appraised value focuses more on establishing a price for property based on known quantities such as square footage, various upgrades such as cabinetry and flooring and corresponding prices of other homes sold in the neighborhood. Appraised value is more interested in quantitative analysis based on objective feedback for a property that stands by itself and its relation to surrounding properties. Whether or not the home is in disrepair and the overall quality of surrounding properties will help in determining an appraised value.

Appraised value for property is not concerned with current trends such as a hot or cold housing market or the motivations of buyers and sellers. Appraised value is often used directly by mortgage lenders to make sure a loan issued against the property is not inflated and to prevent fraud from buyers and sellers working in collusion. In reality, a home buyer and seller working on a cash deal could forgo an appraisal and home inspection if they so choose to keep cost down assuming a high level of trust is present. This often happens among family members because the appraised value would be irrelevant if no mortgage is being taken out in the purchase of the home.

The difference between market value versus appraised value is that market value is subjective and can fluctuate drastically based off of trends and motivations while appraised value is an unbiased and objective analysis of a property's value. For most property transactions it is important to understand and use both values in reference to each other which can help determine whether or not a property is severely overvalued or if it is a diamond in the rough.

Image by: Photo Dean