Market Value vs. Appraised Value: Understanding the Difference and Why It Matters

Understanding the difference between market value and appraised value is essential for anyone looking to buy or sell property. Market value and appraised value are two terms commonly used in the real estate industry. While both terms refer to the estimated worth of a property, they are not interchangeable. In this article, we will explain what market value and appraised value are, how they are calculated, and what the key differences are between them.

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What is Market Value?

Market value is the price at which a property would sell in a competitive and open market, assuming that both the buyer and the seller are acting prudently and knowledgeably, and the property has been exposed to the market for a reasonable amount of time. In simpler terms, market value is what a willing buyer would pay a willing seller for a property in the current market conditions.

Market value is influenced by several factors such as location, condition, size, age, and amenities. Other factors that affect market value include supply and demand, interest rates, and the overall state of the economy.

To determine the market value of a property, real estate agents or appraisers typically conduct a comparative market analysis (CMA). This involves analyzing the prices of recently sold properties that are similar in size, location, and condition to the property being appraised. By comparing the prices of similar properties, real estate professionals can estimate the market value of the subject property.

What is Appraised Value?

Appraised value is the estimated value of a property as determined by a professional real estate appraiser. Appraisers are licensed professionals who are trained to determine the value of a property based on several factors such as its location, size, condition, and other relevant factors.

Appraisals are usually required by lenders when a borrower is seeking a mortgage or refinancing. The appraisal provides the lender with an independent, third-party opinion of the value of the property that they are lending against.

Appraisers use a standardized process to determine the appraised value of a property. This involves inspecting the property, analyzing the local real estate market, and comparing the property to similar properties that have recently sold in the area. The appraiser then uses this information to arrive at an estimate of the property’s value.

Key Differences Between Market Value and Appraised Value

While market value and appraised value are both used to estimate the worth of a property, there are some key differences between the two.

Purpose

The primary difference between market value and appraised value is the purpose for which they are used. Market value is used to determine the price a buyer would be willing to pay for a property, while appraised value is used to determine the value of a property for the purposes of obtaining financing.

Timing

Another key difference between market value and appraised value is the timing of the estimate. Market value is an estimate of the current value of a property in the current market conditions. In contrast, appraised value is an estimate of the value of a property at a specific point in time, usually within the past six months.

Methodology

The methods used to determine market value and appraised value are also different. Market value is determined by analyzing the prices of similar properties that have recently sold in the area. Appraised value, on the other hand, is determined by a licensed appraiser who conducts a thorough inspection of the property and uses a standardized process to determine its value. Read more on how to prepare your home for an appraisal.

Accuracy

Finally, it’s worth noting that while both market value and appraised value are estimates, appraised value is generally considered to be a more accurate estimate of a property’s value. This is because appraisers are licensed professionals who are trained to determine the value of a property based on several factors, whereas market value is based on a comparative analysis of recent sales of similar properties. Appraisals are typically more comprehensive than comparative market analyses, and appraisers take into account a wider range of factors that can influence a property’s value. Read more on what to do if you disagree with your home’s appraised value.

Why is Understanding the Difference Important?

Understanding the difference between market value and appraised value is important for a variety of reasons. For buyers, knowing the market value of a property can help them make an informed decision about whether the asking price is fair and reasonable. For sellers, understanding the market value of their property can help them determine an appropriate asking price that reflects the current market conditions.

For lenders, appraised value is an important factor in determining whether to approve a mortgage or refinance. Lenders want to ensure that the value of the property is sufficient to cover the amount of the loan. Appraisals provide lenders with an independent, third-party opinion of the value of the property, which helps them make an informed decision about whether to lend.

TL;DR Market value and appraised value are two important terms used in the real estate industry to estimate the worth of a property. While both terms refer to the estimated value of a property, they are used for different purposes and are determined using different methods. Market value is an estimate of what a willing buyer would pay a willing seller for a property in the current market conditions, while appraised value is an estimate of the value of a property for the purposes of obtaining financing. Understanding the difference between market value and appraised value is important for buyers, sellers, and lenders alike, as it can help them make informed decisions about buying, selling, or financing a property.


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