When it comes to buying or selling a home, you might hear the terms “market value” and “appraised value” thrown around a lot. But what do they mean? And how are they different? Understanding these concepts is important because they play a big role in real estate transactions. In this article, we will dive into what market value and appraised value are, how they differ, and why they matter.
When it comes to buying or selling a home, you might hear the terms “market value” and “appraised value” thrown around a lot. But what do they mean? And how are they different? Understanding these concepts is important because they play a big role in real estate transactions. In this article, we will dive into what market value and appraised value are, how they differ, and why they matter.
What is Market Value?
Market value is the price that a buyer is willing to pay for a home in the current market. It’s determined by what buyers are willing to spend and what sellers are willing to accept. Think of it as the going rate for homes similar to yours in your area. Market value can change based on various factors like the economy, the housing market, and even the time of year.
For example, if several homes in your neighborhood have recently sold for around $300,000, then the market value of your home might be close to that amount. Market value is all about what’s happening right now in the market. It’s influenced by supply and demand. If there are more buyers than homes for sale, prices might go up. If there are more homes for sale than buyers, prices might go down.
What is Appraised Value?
The appraised value is the value determined by a professional appraiser. An appraiser is someone who is trained to assess the value of a property. They look at various factors like the condition of the home, its location, and recent sales of similar homes in the area. The appraised value is used by lenders to determine how much money they are willing to lend you for a mortgage.
When you apply for a mortgage, the lender will usually require an appraisal to make sure the home is worth the amount you want to borrow. The appraiser will visit the home, take measurements, and look at things like the number of bedrooms and bathrooms, the size of the lot, and any upgrades or improvements. They will also compare the home to similar properties that have recently sold in the area.
Key Differences Between Market Value and Appraised Value
Now that we know what market value and appraised value are, let’s look at the key differences between them. While both values are important, they serve different purposes and are determined in different ways.
- Determination
Market value is determined by the current market conditions. It’s based on what buyers are willing to pay and what sellers are willing to accept. It can change quickly based on factors like the economy, interest rates, and the housing market.
Appraised value, on the other hand, is determined by a professional appraiser. The appraiser looks at various factors like the condition of the home, its location, and recent sales of similar homes. The appraised value is more stable and doesn’t change as quickly as the market value.
- Purpose
Market value is used by buyers and sellers to determine the price of a home. It’s what you see listed on real estate websites and what buyers are willing to pay. It’s important for negotiating the sale price of a home.
Appraised value is used by lenders to determine how much money they are willing to lend you for a mortgage. It’s important for securing financing and making sure the lender is not lending more money than the home is worth.
- Influence
Market value is influenced by supply and demand. If there are more buyers than homes for sale, prices might go up. If there are more homes for sale than buyers, prices might go down. It’s also influenced by factors like the economy, interest rates, and the time of year.
Appraised value is influenced by the condition of the home, its location, and recent sales of similar homes. The appraiser looks at things like the number of bedrooms and bathrooms, the size of the lot, and any upgrades or improvements. It’s a more objective assessment of the home’s value.
Why Market Value Matters
- Determining the Price of a Home
Market value is important because it helps buyers and sellers determine the price of a home. If you’re selling your home, you want to know what similar homes in your area are selling for so you can price your home competitively. If you’re buying a home, you want to know what similar homes are selling for so you can make a fair offer.
- Negotiating the Sale Price
Market value is also important for negotiating the sale price. If a home is priced too high, it might sit on the market for a long time without any offers. If it’s priced too low, it might sell quickly, but the seller might not get as much money as they could have. Knowing the market value helps both buyers and sellers make informed decisions.
Why Appraised Value Matters
- Determining Loan Amount
The appraised value is important because it helps lenders determine how much money they are willing to lend you for a mortgage. The lender wants to make sure the home is worth the amount you want to borrow. If the appraised value is lower than the sale price, the lender might not be willing to lend you the full amount.
Impact on Financing
The appraised value is also important for buyers because it can affect your financing. If the appraised value is lower than the sale price, you might need to come up with more money for a down payment or renegotiate the sale price with the seller. It’s a safeguard to make sure you’re not overpaying for a home.
How to Determine Market Value
- Conduct a Comparative Market Analysis (CMA)
Determining market value involves looking at what similar homes in your area are selling for. This process is often called a comparative market analysis (CMA). Real estate agents can assist you with this, as they have access to data on recent sales and can provide you with a detailed report.
- Identify Comparable Homes
When conducting a CMA, you’ll need to identify homes that are similar in size, condition, and location to yours. These comparable homes, or “comps,” are crucial for an accurate analysis. Look for homes with a similar number of bedrooms and bathrooms, similar lot sizes, and similar overall square footage.
- Evaluate Home Features
Next, compare specific features of these homes. Consider factors such as the age and condition of the home, any recent renovations or upgrades, the presence of special features like a pool, garage, or finished basement, and the quality of the neighborhood and proximity to amenities like schools, parks, and shopping centers.
- Analyze Market Data
In addition to comparing home features, analyze market data to understand broader trends. Look at how long the homes were on the market before selling, the final sale prices compared to the listing prices, seasonal trends that might affect home prices in your area, and the overall supply and demand in the local housing market.
- Consult with a Real Estate Agent
Real estate agents have the expertise and tools to perform a thorough CMA. They can access multiple listing services (MLS) to gather comprehensive data on recent sales. An agent can also provide insights into market conditions and help you interpret the data accurately.
- Consider External Factors
Finally, consider external factors that might influence market value. These can include economic conditions, such as interest rates and employment rates, local developments like new businesses or infrastructure projects, and changes in zoning laws or property taxes.
How to Get an Appraisal
- Hiring a Professional Appraiser
Getting an appraisal involves hiring a professional appraiser. Your lender will usually arrange for the appraisal when you apply for a mortgage.
- The Appraisal Process
The appraiser will visit the home, take measurements, and look at various factors like the condition of the home, its location, and recent sales of similar homes.
- The Appraisal Report
The appraiser will then provide a detailed report with their assessment of the home’s value. This report is used by the lender to determine how much money they are willing to lend you for a mortgage.
- Understanding Appraised Value
It’s important to note that the appraised value is not always the same as the market value. It’s a more objective assessment based on the appraiser’s findings.
What to Do if the Appraised Value is Lower Than the Sale Price
If the appraised value is lower than the sale price, it can create some challenges. The lender might not be willing to lend you the full amount, and you might need to come up with more money for a down payment. Here are some options to consider:
- Renegotiate the Sale Price
One option is to renegotiate the sale price with the seller. If the appraised value is lower than the sale price, the seller might be willing to lower the price to match the appraised value. This can help you avoid having to come up with more money for a down payment.
- Pay the Difference
Another option is to pay the difference between the appraised value and the sale price out of pocket. This means you’ll need to come up with more money for a down payment. This can be a good option if you really want the home and are willing to pay more than the appraised value.
- Get a Second Appraisal
If you believe the appraised value is too low, you can request a second appraisal. This involves hiring another appraiser to assess the value of the home. Keep in mind that the second appraisal might still come in lower than the sale price, but it can provide a second opinion.
Conclusion
Understanding the difference between market value and appraised value is important when buying or selling a home. Market value is determined by current market conditions and is used by buyers and sellers to determine the price of a home. Appraised value is determined by a professional appraiser and is used by lenders to determine how much money they are willing to lend you for a mortgage. By understanding these concepts, you can make informed decisions when buying or selling a home.
