The Difference Between Appraised Value & Market Value of a Home

When it comes to home valuation, two terms often used are ‘Appraised Value’ and ‘Market Value’. We have been appraising homes in Chicago for over a decade, and we often see that people think both of these things are the same. However, that’s not the case.

Market value and the appraised value of a home are related, but serve different purposes in the real estate market. They differ in terms of how they are determined, what they are used for, and who they matter to the most. In this blog, we will take a detailed look at both of these terms and highlight the differences.

What is Market Value?

A basic definition of the market value is the price that a buyer is willing to pay and a seller is willing to accept for a house.

There are several factors that influence this value. Some of them are:

• Supply and Demand: Just like in any other market, low supply and high demand will increase the value of your home. Usually in spring, when demand is the highest, the market value increases a lot. 
• Economic Conditions: Things like interest rates and the job market also influence the market value. If the interest rates are higher, sellers may need to price lower to attract more buyers.
• Property Condition: Naturally, properties in great condition can be priced higher and vice versa.
• Location and Neighborhood Trends: Being in a good location also plays an important role. Proximity to amenities, crime rate in the area, and future development plans can all increase or decrease the market value of a home.

How is it Determined?

There is no formal process to determine the market value of a home. For the most part, it is determined by buyer and seller negotiations and their understanding of the real estate market. 

A real estate agent can perform a comparative market analysis (CMA) to approximate the market value of a home before listing it. This helps the agent and the homeowner set a realistic selling price for the home.

What is Appraised Value?

The appraised value of a home is determined by a home appraisal conducted by a professional appraiser. It is essentially an unbiased estimate of a home’s value. The appraised value is typically required by lenders while issuing or refinancing a loan. Sometimes, buyers may also use it to negotiate the purchase price.

Factors that influence the appraised value of a home include:

• Square footage and Layout: Larger homes and those with functional layouts will be valued more than their counterparts.
• Age and Condition of the Property: Naturally, newly built homes are valued more. Houses with lousy conditions will get a lower appraised value.
• Recent Sale Price of Similar Homes: Appraisers look at recent sales of homes of similar size and condition near you to estimate an ideal value for your home. This is also one of the most important factors.
• Location and Local Market Trends: Houses near shopping centers, schools, and other amenities will be valued higher. Market trends in the local area also play a role.
• Recent Upgrades and Improvements: Any recent upgrades to the home, like a roof replacement, a kitchen remodel, or a driveway replacement, will boost the value of a home. It is important to provide the appraiser with proper documentation of these upgrades to make sure they are accounted for.

How is an Appraisal Conducted

An appraisal is conducted by a licensed appraiser. They visit the house and perform an on-site inspection of the property to assess its value. They will consider all the recent upgrades to the property and various other factors while determining the home value.

The appraiser creates a detailed report outlining their research and providing their estimate of the home’s value.

Key Differences Between Appraised Value and Market Value

The above sections should have given you a good idea of what both of the terms mean. Below, we highlight the key differences between the two types of values.

Purpose

The main purpose of the market value is to determine the selling price of a house. Appraised value, on the other hand, is used by lenders to issue or refinance a loan. It is also used by buyers to negotiate the price.

Method of Determining

Market value is market-driven and is determined by buyers and sellers, so it is more subjective. The CMA conducted by a real estate agent can also help in determining the market value.

Appraised value is determined by a licensed appraiser, with other parties having little say in it. So, it is considered more objective.

Flexibility

Market value can fluctuate rapidly and is heavily dependent on the negotiations between buyers and sellers. The appraised value is based on data, so it is more stable.

Influence

For the market value, it is mostly based on the state of the housing market. Sometimes, emotional factors can also play a major role. Appraised value is strictly data-driven with no emotional factors involved.

What Happens When Appraised Value is Different Than Market Value?

Given the differences between both types of values and how they are determined, it is common that they come in very different than each other. Below, we explore a couple of possible scenarios:

Appraisal Comes in Lower Than Market Value

In a case where the appraisal comes in lower than the market value, the lender may not finance the full amount. This can lead to renegotiation or the buyer paying the difference.

The appraisal can also be challenged, backed with valid data, and have it redone.

Appraisal Comes in Higher Than Market Value

In such cases, the buyer gets a better loan deal. The seller has nothing much to lose here, but it means that the house could be sold for a higher price.

Conclusion

We believe we have made very clear what the ‘market value’ and ‘appraised value’ mean and how they differ from each other. Both of them are important and serve different purposes, and most importantly, they aren’t the same thing.

We are a home appraisal company based in Chicago and can answer any questions you may have about appraisals or the real estate market. If you happen to be in need of a home appraisal, that’s also something we can help you with. For either case, feel free to reach out to us, and our friendly staff should be able to help you.