Appraised value vs. market value: Knowing the difference

Everyone understands that homes are valuable assets, but determining precisely how much a property is worth can be tricky. There are multiple ways to measure their value, but two of the most common are through official appraisals and through finding the home’s market value.

Understanding the difference between these ways of valuing a home and when each is used is important for homeowners who want to understand things like property taxes, mortgage qualification, and the sales price of a property. We’ll break down what you need to know.

Appraised value vs. market value

Homes can be valued in many ways, including by finding their appraised value or their market value.

The appraised value is the estimated value of a home that’s determined by a licensed professional. The appraiser bases the value on things such as square footage, condition, and upgrades. Appraisers are typically hired by lenders when deciding if a home is worth enough to secure a mortgage.

The market value is what a home buyer is willing to pay for a property. Usually a real estate professional such as a real estate agent will be able to come up with an approximate market value, taking into consideration comparative sales, the condition of the property, and other relevant factors. Ultimately a buyer will determine the market value based on their agreed purchase price for a home.

Both of these values can shift over time, sometimes moving slowly and sometimes changing quite quickly.

What is appraised value?

The appraised value of a home is the value that was assigned to it by a professional real estate appraiser at a specific point in time.

Appraisers are typically engaged at the order of the financial institution (bank, credit union, etc.) from which you hope to obtain a home mortgage loan. In effect, an appraisal is a property valuation that’s determined based on recent sale prices of properties in your area and other relevant deciding factors.

Appraisals (which can influence a home’s ultimate sales price and the amount of mortgage you can obtain) are conducted as a safeguard that helps ensure you don’t overpay for a home and that lenders don’t extend loans for more than homes are worth.

These are some key points you should understand about appraisals.

• It’s usually the home buyer’s responsibility to pay for an appraisal as part of the process of applying for a home loan.
• The mortgage lender requesting the appraisal typically chooses the appraiser.
• In the event your bank appraisal comes in under the amount of mortgage you have applied for, it’s common to seek out a second opinion if you feel the first home appraiser’s findings are too low.
• Appraisals are more thorough than tax assessments, which are used to determine property taxes on the home.

Factors that appraisers consider

Appraisers examine many different factors when deciding what a home is worth. The numbers can be quite different from a home’s market value or its assessed value for taxes. If you’re not satisfied with an appraisal and believe you need a second opinion, your real estate agent may be able to help point you in the right direction.

For reference, these are some of the factors that the professionals keep in mind as part of an appraiser checklist:

• Square footage: In general, the larger the size of the home (and the more bedrooms), the higher the appraised value.
• Location: The better the neighborhood and the more desirable the area, the better appraised values tend to be.
• Interior design: Unique features and helpful amenities can also help increase your home’s appraised value.
• Age of house: As homes often suffer significant wear and tear over the years, age tends to erode your appraised value.
• Landscaping: Attractive and well-kept grounds can help boost your appraisal value.

Home appraisers will also look at other homes in your neighborhood to compare the prospective value of your residence.

What is market value?

Market value refers to the actual value of your property when placed for sale on the open market. It’s a variable determined by larger market forces and economic conditions.

The market value of a property is decided by buyers, who value real estate based on what they are willing to pay for it. That means it could vary significantly from the appraised value, especially in very hot or cold markets.

Keep these key details about market value in mind when you’re thinking about buying or selling a home.

• As a general rule, the more competitive the market, the higher the market value you might expect to see on a home.
• The market value of a home, meaning what it sells for, can be higher or lower than its appraised value.
• A property report prepared by a professional may be able to give you a ballpark figure for a home’s market value, giving you a starting point for pricing your home or making an offer to buy.
• Your real estate agent can help you do a comparative market analysis to get a better idea of a home’s market value.

Factors that affect market value

The market value of a home can vary based on many factors. For example, the sale price of nearby homes can help influence the market value of other properties. If you’re thinking about buying or selling a home, you can use recent sale prices as a good way to determine the ballpark value of a property, though an expert can give you a better estimate.

Some of the things that experts will consider when estimating a home’s market value, as well as factors that influence what people will offer when trying to buy a home, include:

• Economic conditions, such as inflation.
• Availability of homes: Generally, with less inventory, your home value will go up.
• Location of your home.
• Amenities in your home.
• General condition of your home. For example, an old roof will bring down value.
• Recent comparable sales.

FAQ

Understanding the difference between appraised values and market values is important for both homeowners and prospective homebuyers. These common questions can help you get a better understanding of what each is.

Why do appraised value and market value differ?

They differ because the appraised value is what a professional appraiser believes a property is worth, versus the market value, which is what the buying public is willing to pay.

What can you do if these valuations are different?

You can pay for a second appraisal at your own expense, but there’s no guarantee your lender will accept it. If you suspect there’s been a mistake, you can contest the appraisal.

How can you improve appraised value vs. market value?

While you cannot assign a value to a home (which is instead determined by a professional appraiser), you can provide your appraiser with relevant information to support your property’s value, such as documentation of all home improvements made to the house.

The bottom line

Though there are key differences between a home’s appraised value and its market value, both are good ways to determine what a home is worth. Appraised values are generally used by lenders when determining if a home can serve as collateral for a mortgage, while market values are what people are willing to pay for a property. Understanding how each is used is important for homeowners and anyone considering buying or selling a home.

If you’re ready to begin your home buying journey, you can get started by applying for a mortgage with Rocket Mortgage^® today.