In a market like ours where prices have gone up pretty steadily, the appraised value and market value of a home can be two totally different things. It’s very important you understand the difference between them and how it might impact your transaction as a buyer or a seller.
Let’s start with market value. Market value is the value that’s arrived at between a buyer and a seller when neither is operating under duress and they’re negotiating openly. Let’s say a homeowner has their home listed at $750,000, the buyer makes an offer, they negotiate back and forth, and they finally agree on a price of $735,000. That’s the market value of that home.
The appraised value is the value an appraiser arrives at by looking at the home and all its features, and then looking at other comparable homes that have sold recently. They adjust those other values and apply them to the subject home. The reason why this can differ from market value is that, in a rapidly moving market, the appraiser is looking at data that could be three-to-six months old, whereas a buyer is shopping in the current market.
I feel that market value is the most accurate value for a property because it represents what’s going on at the time of the offer and what the buyer and seller have agreed upon.
This distinction is important if you’re a home seller because most buyers will pay with a loan, and the lender supplying that loan will have an appraisal done to verify that they’re not loaning more than what the property is worth. The appraisal is mandatory—the lender won’t give the loan unless the appraisal comes in. As a seller, you want your home to appraise. As a buyer, you need the appraisal in order to receive your loan. It’s important for both sides.
If the appraisal comes in low, there are a few ways in which both parties can proceed. The buyer can bring in cash to bridge the gap between the appraised value and their offer amount, the seller can reduce the price, or they can meet somewhere in the middle. Each side can also choose to do nothing, in which case the transaction would fall apart.
So remember—an appraised value is an appraiser’s opinion of the value of a home that’s based on data that’s three-to-six months in the past, whereas market value is what a willing buyer and seller agree on at the time the contract is signed.
If you have any more questions about this topic or you’re curious about what’s going on in our San Diego market, don’t hesitate to give me a call or shoot me an email. I’d be happy to help you.