Appraised Value vs Market Value

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Investing in real estate requires an understanding of how properties are valued. Among the most crucial distinctions to grasp is the difference between appraised value and market value. This differentiation is more than academic; it directly influences investment strategies and financial outcomes. For both new and seasoned investors, recognizing how these values are determined and the impact they have on transactions can safeguard against overvaluation risks.

Appraised value is a professional opinion of a property’s worth. Market value reflects the price buyers are currently willing to pay for a particular property. Market value may sometimes be referred to as the contract price. While both values aim to capture a property’s worth, their paths diverge based on their underlying assessment criteria.

This guide will explore the key factors that define appraised and market values, explain why they might differ, and discuss the implications of these differences for real estate investors. Let’s get to it!

What is Appraised Value?

An appraised value is a licensed professional’s opinion of a property’s worth. This figure is crucial for financial institutions when determining how much money to lend against a property. Appraisers consider several factors, such as recent sales of similar properties, current market trends, and the property’s condition, to arrive at this value.

Why does it matter? For investors, the appraised value can influence the loan amount a bank is willing to offer. It acts as a safety net for lenders, ensuring they do not lend more than the property is worth. In essence, it’s a financial assessment rooted in current data and expert analysis.

What is Market Value?

Market value, on the other hand, is determined by what buyers are prepared to pay for a property in the current market. It reflects real-time economic conditions, buyer demand, and overall market sentiment. 

For investors, understanding market value is key to identifying consumer behavior. A property listed below its market value might represent a bargain buy.

Now, let’s explore the differences between appraised value and market value.

What is the Difference Between Appraised Value and Market Value

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Understanding the distinction between appraised value and market value is crucial for real estate investors. While they both aim to pin down the worth of a property – their approach and the outcomes often differ – influencing real property investment decisions.

Appraised Value is About Risk Management for Lenders: It’s a safeguard. An appraisal is ordered to ensure that lenders don’t offer loans exceeding the property’s worth. This value is derived from a systematic evaluation by a licensed or certified appraiser – focusing on the factors previously mentioned. It’s an approach that is rooted in current data and a thorough analysis of the property and surrounding market.

Market Value Reflects Current Real Estate Dynamics: This value represents what a willing buyer pays a willing seller – with neither being under undue pressure. It is more sensitive to market demand, economic conditions, and buyer preferences shifts. Market value can exceed or fall short of the appraised value based on these factors.

The critical difference lies in their application:

  • Appraised value is used primarily in financing and refinancing transactions. It’s a tool for lenders to gauge the loan amount.
  • Market value is what guides buying and selling decisions among investors and homeowners. It dictates the listing price, contract price and in many cases, the final sale price of a property.

Discrepancies between these values can lead to various scenarios. For instance, a sale might not proceed if the appraised value comes in below the agreed-upon sale price. Unless the buyer is willing to cover the difference out-of-pocket at the closing table. Conversely, a higher appraised value than the market value might not necessarily benefit the seller, but may benefit the buyer if they asked for a seller’s concession.

So what does an appraiser consider when determining their opinion of value? Let’s explore that next.

Factors That Appraisers Consider

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The condition of the subject property is a factor an appraiser will consider when determining an opinion of value.

When determining the appraised value of a property, appraisers look at a variety of factors. Understanding these can help investors see why a property receives its appraised valuation.

Location: The old adage “location, location, location” holds true in real estate appraisal. A property’s value is heavily influenced by its geographical setting. Factors include the quality of local schools, proximity to amenities like parks and shopping centers, and overall neighborhood appeal. A desirable location can significantly boost a property’s appraised value.

Condition: The state of the property plays a critical role. Appraisers examine the age of the home, structural integrity, and any renovations or updates. Newer properties or those with recent, high-quality renovations are likely to be appraised at a higher value. Ongoing maintenance and improvements can positively affect a property’s valuation.

Comparable Sales: Appraisers also consider the sale prices of similar properties in the area, known as comparables, or “comps.” These sales provide a benchmark for valuing the property in question. Comps help appraisers gauge the market desirability of the property’s features and location.

Market Activity: The overall health of the real estate market influences appraised values. In a strong seller’s market, where demand outstrips supply, property values tend to rise. Conversely, in a buyer’s market, values may stagnate or decline. Appraisers take into account current market conditions to provide a contextually relevant valuation.

Can Appraised Value and Market Value Be the Same?

It’s a common question among real estate investors: Can the appraised value of a property ever align perfectly with its market value? The straightforward answer is yes, it can happen but, such alignment is more the exception than the rule.

Market Value, according to the Appraisal Institute, is defined as: 

“the most probable price which a property should bring in a competitive and open market under all conditions. requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.”

When They Align: Appraised value and market value align when the conditions of the real estate market are accurately reflected in the appraisal process. This means that the recent comparable sales data, current market trends, and the property’s condition used by the appraiser match the realities of what buyers are willing to pay at that time. Such alignment often occurs in a stable market, where property values are consistent and predictable.

Why They Differ: More often than not, appraised value and the contract price differ due to the dynamic nature of the real estate market. Market value is influenced by buyer demand, seller circumstances, and other real-time factors that can fluctuate rapidly. Conversely, appraised value is a more methodical estimation, grounded in historical data, thorough analysis, and sometimes more conservative market assumptions.

The Importance of Understanding Both: Knowing whether these values align is less crucial than understanding why they diverge. A disparity can signal changes in the market, potential issues with the property, or even on rare occasions – inaccuracies in the appraisal. 

Ultimately, while appraised value and market value can align, investors should prepare for and understand what guides both outcomes. 

Frequently Asked Questions

This situation can complicate buying or refinancing processes, as lenders typically base loan amounts on the lower appraised value. Buyers may need to negotiate a lower purchase price or cover the difference out of pocket. Understanding both values can prepare investors for such scenarios.

Yes, market value can influence appraised value, particularly through comparable sales. If similar properties in the area are selling for higher prices, this can reflect positively on the appraised value. However, appraisers also consider other factors, making the appraised value not solely dependent on market conditions.

Regular appraisals can help investors keep abreast of their property’s value, especially before making significant decisions like selling or refinancing. While there’s no set rule, having an appraisal every two to three years or in response to significant market changes can be beneficial.

Not all transactions require an appraisal. For example, cash deals may not need one, as no lender is involved. However, appraisals are standard for most mortgage or refinancing applications to protect the lender’s investment.

Improvements to the property’s condition, such as renovations and repairs, can boost its appraised value. However, it may be best to determine the contributory value of improvements beforehand to determine the benefit from a return on investment (ROI) perspective.

Key Takeaways:

  • Appraised value and market value can sometimes align, but they often differ due to the dynamic nature of the real estate market versus the methodical approach of an appraisal.
  • Recognizing the factors that influence both values helps investors anticipate changes in property valuation and adjust their strategies accordingly.
  • Staying informed about market conditions can provide a competitive edge – enabling investors to make timely and strategic decisions.
  • Disparities between appraised and market values should prompt further investigation and consideration – they may affect financing options and investment outcomes.

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