Appraised Value vs. Market Value: What You Should Know

When you are thinking about a home’s value, the first number that comes to mind is typically the property’s market value. Most of the prices you see next to listings online are market values determined by other homes for sale in the area, the home seller, and their real estate agent. However, in real estate transactions, appraised value and market value are both factors that can make or even break the sale of a home.

Though they may seem similar, it is important for homebuyers to understand the differences between the two when it comes to buying or selling property.

What is appraised value?

The appraised value of a home is determined by a state-licensed appraiser who evaluates the property during the mortgage origination process. The borrower will pay for the appraisal, but your lender is in charge of hiring an appraiser and scheduling the appraisal. The appraised value of the property will play an important role in determining your LTV ratio and how much money your lender will allow you to borrow. Put simply, appraisals are conducted in order to ensure a lender does not approve a loan amount that exceeds what the home is actually worth.

An appraiser will consider a number of factors to determine a home’s appraised value, including:

• Comparable local listings

• Curb appeal

• Property location

• Market trends

• Square footage

• Number of bedrooms and bathrooms

• Code compliance

A home’s appraised value may or may not differ from its market value and selling price. In some cases, a home can be sold at a price above the appraisal value in a hot housing market where bidding wars are more common.

There are also a few varieties of appraisals, each with their own unique goal. The most common appraisal types are:

1. Bank appraisals: Though they are referred to as bank appraisals, any appraisal conducted on behalf of a mortgage lender falls into this category. Its goal is to confirm that the home is worth the value of the mortgage loan or more. An unbiased third party is hired to ensure an impartial home evaluation.

2. Tax appraisals: A driving force of revenue for local government is property taxes. That is why tax assessors are employed to keep track of property values in order to ensure taxes are levied fairly and accurately. These tax assessors review property data and conduct tax appraisals (also known as tax assessments). They also use home inspection findings, historical property data, and comparative market research as they conduct their research. Some may even perform in-house visits or a drive-by appraisal.

Note: Regardless of if any other form of appraisal comes in at a higher value than the tax assessment, you will not have to worry about your taxes automatically rising. Tax appraisal values are simply used to calculate your property tax.

3. Real estate appraisals: The third most common type of appraisal is a valuation of a property’s market value. It is meant to assist sellers preparing to list their home for sale. Unlike the first two types, a real estate appraisal will also often include a listing strategy with marketing techniques and various pricing plans.

What is market value?

The market value of a home is defined as the amount buyers are willing to pay for purchasing it, not necessarily what the seller lists the home for. Unlike the appraised value, which is determined and defined based on an appraiser’s findings, the market value is adjusted based on market conditions. The overall economy, popularity of the home’s location, and whether it is a buyer’s or seller’s market all play a role in determining the market value of a house.

Some of the factors that influence a home’s market value include:

• Location

• Overall property condition

• Recent upgrades

• Local market trends

• Macroeconomic trends

• Home size

There are a good number of similarities to the elements considered by an appraiser’s evaluation. However, local and open market trends will have a more significant impact in determining the influence on buyers and what they are willing to pay to purchase a home.

Appraised value vs. market value

Appraised value is what a licensed appraiser deems the property is worth as determined through a rigorous evaluation process.

Market value is the general estimated value of the home based on similar listings, the open market, and what the public is willing to pay. The market value is determined by homebuyer response to market conditions.

What happens when the appraised value differs from the market value?

Since the home acts as collateral for a mortgage, most lenders will not approve a home loan for a property that is appraised at a value below the purchase price (or market value). Differences between the market value and appraisal value of a home can also cause significant settlement delays. According to a 2023 study conducted by the National Association of Realtors Confidence Index Survey, as much as 7% of real estate transaction contracts were delayed due to appraisal issues. These issues become more common in a seller’s market where demand for homes tends to drive up the asking prices.

However, in a case where the appraisal comes back at a higher value than the market value, lenders will normally approve your mortgage. This is because the property is more than adequate collateral. On the flip side, though, sellers sometimes have an issue accepting offers that are below their estimated market value, especially if they feel they deserve more than the buyer is willing to pay.

The good news is, there are mortgage contingencies that buyers can utilize within real estate contracts that can protect you in the case of a sale falling through.