The Big Picture on Appraised Value vs. Market Value:

    • Appraised value, determined by professional appraisers for mortgage purposes, is based on property condition and market trends. Market value is the price a buyer is willing to pay, influenced by market conditions and demand​.
    • Appraised value helps lenders assess loan risk, potentially affecting financing. Market value determines the sale price, reflecting buyer perceptions and market conditions​.
    • Investors use appraised value for a conservative estimate and securing financing, while market value guides potential returns and pricing strategies based on current market conditions.
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appraised value vs market value

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.

 

Appraisals Step By Step

Here’s a detailed explanation of how appraisals work:

Step Description
Order the Appraisal The lender orders the appraisal through a third-party appraisal management company to ensure unbiased results.
Assign an Appraiser An appraiser is assigned to the property, typically chosen based on their experience and proximity to the property location.
Initial Research The appraiser reviews public records, previous appraisals, and MLS data to understand the property and neighborhood.
Site Visit The appraiser conducts a thorough inspection of the property, noting its condition, improvements, and any features that impact value.
Measure and Document The appraiser measures the property’s dimensions, photographs key areas, and documents any significant issues or amenities.
Comparable Sales Analysis The appraiser selects comparable properties (comps) that have recently sold in the area to compare with the subject property.
Adjustments Adjustments are made to the comps based on differences in features, size, condition, and location to estimate the value of the subject property.
Reconcile Data The appraiser reconciles the data from the site visit and comparable sales to arrive at a final appraised value.
Appraisal Report The appraiser compiles all findings into a detailed appraisal report, including property descriptions, comps, and final value.
Review and Submission The appraisal report is reviewed for accuracy and completeness, then submitted to the lender for the mortgage approval process.

Appraised Value Vs 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.

Factors That Affect Appraisal Value

As a seller, you have all the incentive to raise your property’s appraised value. Here are what you need to consider when aiming for that:

    • Property condition
    • Location
    • Size and square footage
    • Age of the property
    • Upgrades and improvements
    • Comparable property sales (comps)
    • Market trends
    • Architectural style
    • Lot size
    • Neighborhood amenities
    • Economic conditions
    • Zoning and land use regulations

 

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.

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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 appraisals with tax assessments. 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 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.

 

Final Thoughts on Appraised Value vs. Market Value 

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?

 

 

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