Appraised Value Vs. Market Value: Knowing The Difference

Wondering what your home’s appraised value is versus its market value – and how both might impact a potential sale or home purchase? You’re not alone, as the appraised value of a property can often differ significantly from the same piece of real estate’s market value in practice.

To find out more about how appraised value versus market value work, and how each term is defined by industry pros, we’ve put together a handy guide to these basic real estate principles.

An appraised value is assigned to a property by a professional real estate appraiser at a specific point in time. On the flip side, market value is a variable that’s determined by larger market forces and economic conditions. Ultimately, the market value of a property is decided by buyers, who value real estate holdings based on what they think the price of a property should be and what they are willing (or can get approved) to pay for it.

The appraised value of your home can change significantly over time with the market. Fair market value can also shift based on current economic and local market conditions, as well as the condition and age of the home as well as other factors.

What Is Appraised Value?

Both a home appraisal as well as a home assessment are relative measures that the real estate industry considers in its quest to determine the value of a home. But they aren’t one and the same.

Your home’s appraised value is determined by a state-licensed real estate professional known as an appraiser. Appraisers are typically engaged at the order of the financial institution (bank, credit union, etc.) with 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 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 lenders don’t extend loans for more than homes are worth.

At the same time, take note: It’s usually the home buyer’s responsibility to pay for an appraisal assessment as part of the process of applying for a home loan. Under typical mortgage lending scenarios, the buyer will go to a lender to obtain a mortgage, and the chosen lender will ask a licensed professional to consider all property details (interior and exterior) to arrive at a home appraisalvalue. Getting this home appraisal is an essential part of the mortgage approval process, and you'll need to complete this step before getting final approval from your lender.

Bank Appraisals

Of course, just because you know the meaning of a home appraisal and you need a professional appraisal, there’s other appraisal language that you should be familiar with when it comes to valuation as well.

As above, the term bank appraisal refers to an appraisal conducted by your financial lender, noting that it will not lend any more money to you than what the property is worth (based on the appraised value that your lender has ultimately arrived at). Note that 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.

Tax Assessments

A tax assessment is completed to determine a property’s assessed value, which is a relative measure of its value that is utilized to determine the amount of property taxes that the government will levy on the building. Home appraisals are based on a more in-depth analysis than tax assessments, being a fundamental part of the mortgage underwriting and due diligence process.

Tax assessments are completed by government tax assessors, who are employed at the instruction of cities, municipalities, towns and other local government entities. These professionals review property data and visit local homes to determine their assessed value. A variety of factors such as home inspection findings, historical property data and comparative market analysis will be considered as they work to arrive at a property’s assessed value.

An assessed value helps local and county governments to determine how much property tax a homeowner will pay. Sums collected as property taxes are used to pay for public services, public works and other civic benefits.

For clarity’s sake, please know that having a home appraisal conducted won’t raise your property taxes, as the tax appraised value is determined by the county assessor’s valuation (performed using a different methodology).

What Is Market Value?

Market value refers to the actual value of your property when placed at sale on the open market. It’s determined by buyers and defined as the amount they are willing to pay for purchasing the home.

Regardless of appraised or assessed value, market value is essentially the amount that buyers are willing to pay for your property and what they think the value of the home is.

In other words, the government can think your home is worth a certain amount, the bank another and buyers still less or more than what your property’s appraised or assessed value. If you’re confused, we don’t blame you.

Market Value Scenario

For example, Alex may wish to sell their property for $300,000. But if prospective buyer Taylor has already gotten their preapproval and knows they can only afford $250,000, they might put in an offer for this amount or somewhere between the two sums (if it’s a competitive market). Many different scenarios might come into play when it comes to the home buying process and reaching a fair market value – however, as a general rule, the more competitive the market, the higher the market value you might expect to see on a home.

If you’re in the home buying process, make sure you go in knowing how much you can afford. One way to do this is to make getting approved the first step in your home buying journey. With an approval letter in hand, you can be sure you are only looking at properties that are within your budget. Then, once you find your dream home, you can confidently put in an offer that takes your approval amount, market value and appraised value of the property into consideration and can help ensure you don’t overpay for your new home.

When it comes to the home appraisal process, it’s important to leave valuations to the experts. More than likely, your real estate agent can point you in the right direction if you need a professional opinion (or second opinion) on the appraised value of a home.

For reference, factors that the professionals keep in mind as part of an appraiser checklist when evaluating the interior and exterior of a property, and assigning a home appraisal value, can include, but are not limited to:

• Square footage: In general, the larger the size of the home (and more bedrooms), the higher the appraised value.
• Location: The better the neighborhood and 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.

Of course, as they go about conducting their evaluation, home appraisers will also look at other homes in your neighborhood to compare the prospective value of your residence.

As a potential home seller, though, it’s ultimately your choice to consider what you think the market value of your home should be. However, you should wait to take a stab at determining how much to sell your home for until after you hear more about its appraised value from a professional because there are many factors that go into determining the value of a home.

Mind you, many people will have different opinions on what the market value should be (ex: one person may think your home is worth the asking price, and another might think the asking price should be lower). In the end, though, it’s buyers in your area who will determine fair market value for a home by choosing to vote with their pocketbook.

Why do appraised and market value 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 except it. Likewise, if you suspect there’s been a mistake or foul play, 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.

To summarize, your home’s appraised value is the value it is assigned by a professional real estate appraiser, with an eye towards ensuring that your financial lender is not extending an overly large loan.

On the flip side, your home’s market value (decided by home buyers) is the amount they believe your property to be worth – and how much they’re willing to pay for it.

As for your home’s assessed value? It’s determined by the government and impacts how much that you can expect to pay in annual property taxes.

Confused? It happens sometimes in the world of real estate, but know that if you have any questions here, you’re encouraged to reach out to experts in the field – and remember that you can always get a second opinion (even on a home appraisal). In general, though, you shouldn’t be paying more for a home if you find that its market value differs significantly from its appraised value.

If you haven’t already done so, you should get the mortgage approval process started before continuing your house hunt. Without initial approval from a lender in hand, your offer might not be as attractive to sellers. Get approved today so you don’t miss out on your dream home!