Picture this, you’ve just found the perfect house. The market value is exactly what you were hoping to pay, and everything feels right.
But when the appraisal comes back, it’s much lower than expected. Suddenly, you are faced with a tough decision. Do you renegotiate, or walk away?
The aim of this article is to help you understand the difference between market value and appraised value, so you can avoid making the same costly mistake.
Market Value
In the world of real estate, market value refers to the price at which a property would sell in the open market under normal conditions. It’s determined by what buyers are willing to pay and what sellers are willing to accept.
Ultimately, market value reflects the price a property is likely to sell for in today’s market and fluctuates with real estate market trends, which can shift due to factors like:
Comparable properties also known as comps
Local demand and supply
Economic conditions like Interest rates, consumer confidence, and general economic factors
Appraised Value
On the other hand, appraised value is an expert’s independent opinion of the property’s worth, determined by a certified real estate appraiser. An appraiser evaluates the home based on specific criteria such as:
Property condition
Comparable sales
External factors like Proximity to schools, parks, and other amenities
Lenders often use appraised value when deciding how much they are willing to lend for a mortgage, as it ensures they aren’t lending more than the property is actually worth.
The Key Differences Between Market Value and Appraised Value
Though both values estimate what a property is worth, they differ significantly in how they are determined:
1. Basis of Determination
Market value is influenced by buyer demand and current market conditions, whereas appraised value is based on an appraiser’s evaluation of the home’s condition and location, as well as comparable sales.
2. Impact on Transactions
Market value dictates the sale price of a property, but appraised value influences the loan amount a lender is willing to offer. If the appraised value is lower than the market value, the buyer may need to adjust their offer or provide additional funds.
3. Stability
Market value can fluctuate quickly due to economic shifts or buyer demand, while appraised value tends to be more stable and based on concrete, objective data. Understanding these differences is essential for both homebuyers and sellers.
Buyers must ensure that the appraised value aligns with the market value to avoid overpaying, while sellers should price their property according to current market trends while keeping the appraised value in mind.
