Appraised vs. Market Value: What’s the Difference?
Your home’s value depends on who’s asking
An appraiser determines your home’s appraised value, while a real estate agent determines market value.
Appraised value is more useful for mortgage lenders looking to protect their investments.
Market value is solely to give you an idea of what price your home will fetch on the open market.
Whether you’re buying or selling a home, there’s a good chance you’re running into some terms that confuse you. You might be wondering what the difference is between the appraised value and the market value of a home. In this guide, we’ll discuss home appraisal value versus market value, what purpose each one serves, and why both of them are useful in a real estate transaction.
What’s the Difference Between Home Appraisal Value vs. Market Value?
A home’s appraised value is the actual value of a piece of land and the improvements based on the professional opinion of a home appraiser. A mortgage lender will use the appraised value to ensure its investment is protected and to determine loan-to-value (LTV) ratios for the buyer. Market value is the expected sale price of a property based on the opinion of a local real estate agent. The appraised value and market value can and often do differ.
Appraised Value vs. Market Value: Differences in Determination
There are a few key differences between appraised value and market value related to the professional that determines them and the method they use.
Professional Opinion
Both appraised value and market value are the opinions of professionals, but the two figures come from different experts. A local home appraiser, often one that the mortgage lender hires, determines the appraised value. A real estate agent, whom either the buyer or seller can hire, determines the market value.
Method
These two home valuations differ most in the method the professional uses to come up with value.
An appraiser will assess the inherent land value of the property, look at comparable sales in the area, and look at many aspects of the home to figure out what the property is worth. Some other things they’ll often use in their home appraisal checklists include the following:
The number of bedrooms
The number of bathrooms
The functionality of the floor plan
Proximity to schools, commercial property, railroad tracks, etc.
The quality and condition of building materials
Plot size and shape
When a real estate agent determines the market value of a property, they’ll usually only consider comparable listings and sales in the vicinity. They might make adjustments based on functional obsolescences or property condition, but they’re mostly coming up with an opinion of what the property will sell for, whereas an appraiser uses a more scientific approach to determining value.
Various factors affect your home's appraisal value, including its location, age, condition, curb appeal, and comparable properties. These factors can help or hurt your home's value.
Timeline
A real estate agent will first walk through your property to get a sense of the condition but then determine the value remotely by looking at comparable listings and sales in your area. The walkthrough could just take a few minutes.
An appraiser will take more time to assess every aspect of your property. This type of home inspection can take an hour or two, and getting an appraisal can take a week or more.
Appraised Value vs. Market Value: Differences in Usefulness
There are also a few key differences in how you can use the two types of property value estimates.
Mortgage Lending
Most mortgage lenders will require an appraised value to determine whether or not they’ll approve the loan. They use the appraised value to confirm that they’re not exposing themselves to too much risk—for example, lending far more than the property is actually worth—and also to determine LTV values to remain in compliance and insulate themselves further.
Mortgage lenders will never use the market value as the value of a home, as the market value and appraised value can differ widely, especially in particularly hot markets, where buyers may be willing to overpay for a home.
Deal Negotiation
Market value might help you determine how much you should list your property for and accept once you get an offer, but neither side will really be able to use it as leverage in negotiation. Appraised value, on the other hand, can play an important role in real estate negotiations.
If the appraised value comes in below the offer price, a buyer may renegotiate and lower their offer to avoid overpaying for the home. If the appraised value comes in above the offer price, a seller might use it as leverage to push the sale price higher. However, the effectiveness of the leverage you can gain from an appraised value depends on how hot the local market is.
Sale Price
The market value determined by the real estate agent may affect what a seller is willing to accept for the property, but the appraised value can prevent a sale from going through if it differs too much from the offer price.
For example, if the appraised value comes in well above the offer price, the buyer’s lender may decline to lend against the property because its investment is exposed to too much risk. The lender may require the buyer to pay more out of pocket for the home to get the loan approved, which could cause the deal to fizzle.
Who Orders the Valuation
Finally, the two valuations differ in who orders them. If a seller hires an agent, the agent will always provide a market value to determine where they should list the property and what offers they should entertain. A buyer often won’t ask for a market value, although their agent’s opinion may influence where their offer stands.
Both sellers and buyers can order appraisals to help with negotiations, but the buyer, provided they’re financing the property, will always need to pay for a home appraisal. The appraisal is a requirement for lenders to lend against a property.
The differences between market value and appraised value depend on the local market, so they can match, or either one can be higher than the other. In a “seller’s market,” where there is an abundance of buyers, market value will likely sit higher than the appraised value because there’s more demand for the low inventory of homes. In a “buyer’s market,” where there are more homes than there are buyers, the market value is more likely to sit below the appraised value to entice buyers.
Ideally, you’d never pay more than the appraised value for a home, but there are some instances where it makes sense to do so. For example, if your current living arrangements are no longer viable and you need a place to move into quickly, paying more than the appraised value might be in your best interest to secure a new home. Additionally, if you’re buying in a hot market, overpaying for the home might be necessary to overcome the competition.
If the sales agreement has a clause that allows the seller to renegotiate based on the appraised value, then they might be able to back out if the appraisal comes in higher than your offer price. If the agreement doesn’t have that language, then the seller has no legal recourse to back out. They could hold a higher offer as a backup and move onto that one if yours falls through for any reason, but once the agreement is signed, the seller is locked into that purchase price unless there’s a clause stating they can renegotiate.
