Appraised Value vs. Market Value: what's the difference?
I feel like this topic is necessary to be spoken about based on the current state of the Real Estate Market.
A lot of people are paying more than appraised value for homes these days considering most homes go into a multiple offer situation, and as a buyer you need to stand out and you really don't want to lose out on the home, so you agree to pay the difference between appraised value and purchase price if the home you are buying does not appraise for purchase price.
But.... doesn't that mean I'm paying more than what the home is worth?
Technically, yes. But also...no. You're paying market value.
Market Value = simply what a buyer is willing to pay for a home.
A home's market value is influenced by many factors:
- Comparable Sales
- Inventory levels & local buyer demand
- A home's unique features, amenities, and condition
However, market value is not looked at by a lender. A lender looks at appraised value, and takes that into consideration when giving you a loan.
Appraised Value = an evaluation of a property's value based on a given point in time. The evaluation is performed by a professional appraiser during the mortgage origination process. The appraiser is usually chosen by the lender but the appraisal is paid for by the borrower.
Appraised value may not correspond to a property's market value.
Factors that can affect the appraised value of a piece of property include:
- Curb appeal
- Any infrastructure issues that need to be addressed
- The comparable sale prices for neighboring homes
- Local crime rates
- Proximity to less-than-desirable features could negatively affect the appraised value (this could include being located next to a source of noise pollution such as an airport or train station)
If a property is in good condition, its appraised value may fall in line with similar properties in the surrounding area.
Property owners might seek to improve the appraised value of real estate by making improvements that go beyond general upkeep and basic repairs. For example:
- Adding a deck or patio to the property to increase the recreation options
- Heating and ventilation could be improved with more energy efficient equipment
- Smart controls can be installed that allow appliances, lighting and security systems throughout the home to be operated remotely and automatically
- The garage could be expanded to accommodate more vehicles
- Bathrooms might be upgraded with new showers or tubs
- Kitchens could be renovated with new ovens, increased counter space and a garbage disposal system.
So basically, there's two values placed on a home and sometimes they don't always match up. And that's okay!
As a buyer in today's market, I recommend really considering how much you are paying over list price on a home. If it seems worth it to you to pay that appraisal difference and you have the capital to do so, by all means...do it. This will help you win in a multiple offer situation.
However, if you aren't necessarily comfortable paying over what your lender's appraiser says the home is worth, I would recommend either holding off on buying until inventory rises, or just continue to stay strong and hopeful in your offers in other ways.
Neither options are wrong.
