What is the Difference Between Market Value and Appraised Value?
If you are a first time home buyer, all of the terms associated with real estate and mortgages can be a bit confusing. Of course, that’s why a real estate agent is so important in moving you through the process of buying your first home. With a real estate agent, every step of the journey is explained for you and you can ask whatever questions you want. One of the most common questions I hear is what is the difference between market value and appraised value.
What is market value?
Market value is simply the price a person is willing to pay for a particular house. It’s driven by demand and scarcity in the area. When there are too few homes on the market in a particular area, then prices are higher. Alternatively, when there are too many homes on the market, and not enough people who are buying, then prices dip a bit.
What is a buyer’s or seller’s market?
This demand and scarcity is what determines whether we are in a buyer’s market or seller’s market. A seller’s market is when demand for homes is higher than the available number of homes. Sellers have the advantage in the negotiation process, because they are likely receiving multiple offers on their home. Buyers have to be less picky about what repairs they ask for after the inspection and flexible on what closing costs they ask the seller to pay for.
In a buyer’s market, there are more homes available than there are buyers. Homes sit on the market a bit longer and prices tend to dip. In a buyer’s market, the buyer has the advantage and can negotiate price when making an offer and ask for extras such as having the seller pay closing costs.
What is appraised value?
After you’ve got your pre-approval and had your offer accepted on your dream home, the next step is to get your future home appraised. This generally happens within the first week after you are under contract and is required by the lender to determine value from a trusted source.
A trained home appraisal specialist comes to your new property and checks the condition of the home, then uses other comparable homes in the area to arrive at the estimated appraisal value. This number is passed onto the lender. However, the appraised value and market value do not always match up! This is especially true in today’s market when prices are rising rapidly.
What happens when appraised value and market value don’t match up?
When the appraised value is lower than the market value, there are a few things that can happen.
The buyer can pay cash for the difference between the appraised value and the market value and essentially only request financing for the appraised value.
The buyer and seller can negotiate the terms of the offer and find a way to work together to complete the sale.
The buyer can walk away from the transaction and start a new home search.
I hope that helps clarify the process a bit and answer any questions you might have about what is the difference between market value and appraised value. During some years the two are generally closely aligned, but in other years one may come in higher than the other.