In the world of real estate, appraisals play a crucial role in due diligence for property buyers and lenders alike for every real estate transaction. During an appraisal, a licensed professional appraiser visits and assesses the overall value of a property based on various factors.
Whether you’re buying or selling a single-family home, refinancing a mortgage, or considering an investment in a multi-unit property, you need to understand the concepts of appraised value and market value.
But how do appraisals work, and what are the differences between appraised value and market value? Strap in for those and other questions about appraisals for real estate investors.
How Do Appraisals Work?
Anyone who has taken out a mortgage to buy a home has usually worked an appraiser. Typically, the mortgage origination process with a lender includes hiring a professional appraiser to assess a property’s appraised value before they agree to fund a home or investment property loan. But that’s not the only situation that calls for an appraisal.
The primary purpose of an appraisal is to provide an unbiased opinion of a property’s worth to ensure fair transactions, determine property taxes, or mitigate risk for lenders.
The appraisal process begins with the appraiser conducting a visual inspection of the property, noting its size, condition, layout, and notable features. Next, the appraiser researches recent sales of comparable properties in the area (known as “comps”) to determine the property’s value based on the current market. The appraiser then prepares a detailed appraisal report and assigns a total estimated valuation to the property.
Appraised Value Versus Market Value: What’s the Difference?
Although they sound similar, appraised value and market value are not the same. Real estate investors must understand both figures and when the two values might differ.
What is Appraised Value?
Appraised value is the estimated value of a property as determined by a certified real estate appraiser. Professional appraisers consider factors like the property’s location, square footage, floor plan, age and condition, plus recent sales of comparable properties and current market conditions to arrive at an estimate of its total value. The appraised value serves as a reference point for buyers, sellers, and lenders during real estate transactions.
Although appraisals aim to provide an objective evaluation, it’s important to note that appraised value is not an absolute or fixed figure but rather an estimate based on professional judgment and analysis. Different appraisers’ professional opinions or changing market conditions can lead to variations in the appraised value of a property.
What is Market Value?
Market value of a property, on the other hand, reflects the selling price a buyer and a seller agree upon in the real marketplace. Supply and demand, economic conditions, current market trends, the local real estate market, and buyer preferences can all cause market value to fluctuate, as in any competitive marketplace.
For example, your master bathroom having outdated harvest gold fixtures probably won’t affect your appraised value at all, but if it’s ugly enough to turn off buyers it could influence the market value of the home.
What the #%& are real estate syndications, and do they really earn 15-30% returns?
Differences Between Appraised Value and Market Value
In a nutshell, the appraised value of a property is the amount an objective third-party appraiser estimates a property is worth based on the property’s characteristics and condition, but market value is the purchase price a buyer and seller in a competitive housing market actually agree upon.
If those sound pretty similar, in most cases they are.
Usually an appraisal performed during the homebuying process comes in “at value.” An appraisal at value means the appraiser determines the property value meets or exceeds the purchase price (market value). In other words, no appraisal issues.
Sometimes, however — especially in a seller’s market — list prices may begin to rise faster than appraised values as buyers compete with one another. In these conditions, a competitive price for a property on the market may exceed the value assigned to it by an official appraisal.
If the appraised value of a property comes in below the purchase price, the prospective buyer may have a problem getting financing. Financial lenders generally won’t lend more money to buy a property than it’s worth. To close the gap between appraised value and market value, the seller can lower the purchase price, the buyer can bring more money to the table, or both. If both the buyer and seller can’t agree to a compromise, either party can cancel the sale and walk away.
Appraisal Versus Tax Assessment
Sometimes people confuse the ideas of appraisals and tax assessment. Again, these are similar ideas but they mean something different.
Local governments set property tax rates based on property values. Municipalities or counties employ tax assessors to visit homes in the area to determine their assessed value for tax purposes.
The assessed value that a tax assessor assigns to a property determines how much the owner will pay in property taxes each year, but it has no particular bearing on the price the property can fetch in the open market. Lending institutions instead hire professional appraisers to conduct a more thorough appraisal of each individual property in an attempt to estimate its fair market value.
FAQs About Market Value vs. Appraised Value
Most people don’t interact with property appraisals more than a few times in their lives. Real estate investors may encounter this process a bit more often. Here are some common questions about appraisals.
Who Appraises a House?
Professional, state-certified property appraisers conduct property appraisals. Typically, the mortgage lender selects a licensed appraiser in your area, and the borrower usually must pay for the appraisal. You can also find appraisers online and hire them yourself to conduct a pre-listing appraisal, which is especially useful if you plan to sell a property without using a real estate agent.
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How Much Does an Appraisal Cost?
How much an appraisal costs depends heavily on the size and complexity of the property being appraised.
A typical single-family home appraisal may cost between $300 and $500. Multifamily homes tend to cost a bit more. Properties on large plots of land cost more to appraise because the appraiser may need to survey the boundaries to confirm the land’s acreage. Remote or rural properties sometimes cost more because fewer appraisers cover these areas, and borrowers seeking VA loans may pay extra for VA-approved appraisers.
How Can You Improve a Property’s Appraised Value?
Appraisers consider many factors when assessing a property’s value, including fixed features of the home like its location, age, and square footage. But if you want to maximize your appraised value—say, in preparation of listing a property for sale—there are several factors you can control. Curb appeal, landscaping, and interior design can all affect appraised value.
Before you invest heavily in landscaping or an interior decorator, however, you should be aware that expensive aesthetic improvements usually don’t provide dollar-for-dollar returns in terms of higher appraisals. But some DIY cleanup in the yard and updates inside can help move the needle.
Can You Appeal a Property’s Appraised Value?
Depending on what lending program the buyer is using, it may be possible to appeal an appraisal if it appears the appraiser has valued the property too low. You’ll need to submit comparable sales and likely conduct another appraisal, which will cost additional appraisal fees and delay the sale.
Why Appraisals Matter to Real Estate Investors
As real estate investors, appraisals provide critical information about a property on both sides of any transaction.
For buyers, the appraised value is crucial because it helps determine the maximum amount a lender will finance for a property. If the appraised value falls short of the purchase price, it can impact your ability to secure a loan or require you to come up with more cash at closing to cover the appraisal gap.
For sellers, understanding the appraised value of your property can help in setting a realistic listing price and attracting potential buyers.♦
What have your experiences with real estate appraisers been?
Thanks for the breakdown!
Glad it was helpful Jehu!
Hello, I’m interested in learning more about foreclosure properties and their value in the real estate market. Specifically, I’m curious about how appraised value and market value impact the sale of foreclosed properties and how lenders can ensure they recover the maximum value from these sales. Can you shed some light on this topic?
Foreclosures typically drag down values in a neighborhood, as they generally have a lot of deferred maintenance.
Thank you for providing such a clear and comprehensive guide!
Appraised value certainly plays a vital role in mortgage financing, buying and selling decisions, investment strategies, insurance coverage, and many many property-related matters. Easy to mix up the terminology though when you’re new to real estate investing.
No question B.!