Appraised value refers to the estimated value that a professional appraiser assigns to the house, usually at a bank’s request. Market value is what a property actually sells for on the open market.
What is Appraised Value?
The appraised value of a house is based on an assessment of the property performed by a third-party appraiser. Most of the time, appraisals are ordered by your financial institution in order for them to get an accurate estimate of the value of your house.
What Factors into an Appraisal Value?
Appraisers look at dozens of different factors, each of which can affect the house’s value. Here are some of the big ones:
- Nearby sold homes – Appraisers will usually look at nearby comparable houses that have sold recently and then adjust from there. It makes sense to time an appraisal after a nearby high sale to maximize your house’s appraised value.
- Square footage – The larger the house—especially beds and baths—the more value the house has.
- Property size and landscaping – A large, well-kept property will certainly raise your property’s value.
- Location – A house in a quiet neighborhood next to a park is worth more than the same house next to a Burger King.
- Garage size – When homes get to a certain size, larger garages are a valuable feature.
- Updates – If your house has a nice deck, quartz countertops, and upgraded fixtures, your property will get a bump over a property that doesn’t.
What is the Purpose of Appraised Value?
Determining the appraised value is useful when you’re trying to buy a new house or to have your current one refinanced. Banks need to protect their investment and want to ensure they’re not lending more than a property is worth.
For example, if the appraiser estimates your property to be worth $500,000, banks generally won’t lend more than that to a prospective buyer. If they lent a buyer $550,000 in that scenario, then repossessing the house means they’ve lost money.
If you’re refinancing your property, banks will generally lend you around 80% of the appraised value. A higher value can be incredibly important if you want to take out some cash.
You can do a few things to maximize your appraised value, such as doing some quick landscaping (e.g., planting flowers), deep-cleaning your house (not supposed to make a difference, but appraisers are human), and waiting until a nearby house sells for a good price.
Tax Assessments
Tax assessments are similar to an appraised value in that a third party (in this case, a county assessor) estimates the home’s value. In this case, the value determines how much you’ll pay in property taxes.
This calculation, by necessity, is simpler than an appraisal because every house needs to have a value assigned for tax purposes. Assessors generally look at factors such as historical property data and comparative market analysis to help determine value.
What is Market Value?
Market value is the actual amount that the property sells for. When you list your property and it sells for $500,000, that’s the property’s market value. This number is more important to most people because it’s real money they can put in their pocket.
For example, if your house appraises at $500,000 but the best offer you get is $475,000, then that appraisal only serves as a source of frustration. The higher appraisal won’t put any more money in your pocket.
How Do You Determine Market Value?
Determining market value is actually fairly similar to appraised value, but the price of sold comparable properties is even more impactful.
An appraiser often starts with the sold comps and then adjusts up or down based on the differences in the property. This is how market value should work as well, but in reality, some buyers won’t care enough about an upgrade to pay extra. Or, they might pay more.
A neighbor has a very similar property to yours, except you have a 3-car garage compared to their 2-car garage. An appraiser might add $15k for that extra spot, but perhaps none of your buyers value it that much, and you can only get $5k more for it when it’s time to sell.
Of course, your buyer may value a 3-car garage more than the appraiser, and you can get $30k more than your neighbor.
What is the Purpose of Market Value?
The purpose of market value is that you’re talking about real sales prices that result in money in your pocket.
Think about it like this: an appraiser says your house is worth $500,000, but they don’t take into account a hot market with rising prices. You have a bidding war on your hands, and the house sells for $550,000.
As long as your buyer is willing to front the cash to make up the extra cash (because the bank will only lend $500k), you’ve made much more money than you thought. The appraisal is mostly irrelevant. The market value is what made you the extra cash.
Market Value Working Together With Appraised Value
In general, market value and appraised value are closely linked. When you sell your house, you’ll need to factor in both.
Often, you won’t be able to get much more than the appraised value of a house because banks will only lend the buyer the appraised amount.
If the buyer is willing to offer more than the appraised value, they often have to pay the difference out of pocket.
Let’s say you’re selling your house and have an offer of $500,000. The bank orders an appraisal and values your house at $480,000.
The bank will lend the $480,000, but the buyer will have to come up with the extra $20,000 on top of their regular down payment. This can be a massive detriment to selling your house at the offered price.
Owners may also be able to negotiate with a homebuyer using the appraised value. In a buyer’s market, perhaps offers are coming in a bit low. If the seller wants $400k and gets an offer for $360k, they might be able to use a $420k appraisal to help negotiate with the buyer to raise their offer.
Appraised Value and Market Value for Real Estate Investors
Real estate investors constantly keep tabs on their properties’ appraised value and market value. There are many reasons for this, including:
- Finding good times to sell – If market values are rising rapidly, it may be a good time to sell, and then buy back in when the market goes back down.
- Refinancing – Rental property owners may want to refinance to a lower monthly payment to increase cash flow. Or, if they get a favorable appraised value, they may be able to do a cash-out refinance and use the lump sum as a down payment on another rental property.
- Keeping tabs on cap rate – Cap rate can be used to determine how much rent should be. As the market values change, cap rate changes. Owners can raise rent to keep cap rates aligned with the local area.
Appraised Value and Market Value FAQs
Here are some of the most commonly asked questions concerning appraisals and market value.
Are Appraised Values Public Record?
No, appraised values are not public record. According to the Universal Standards of Professional Appraisal Practice, appraisers are required to keep appraised values private.
Are Market Values Public Record?
Yes, market values are public record. You can find them on sites such as Zillow, or your real estate agent can also help you access nearby sales.
How Do You Raise the Appraised Value of a Property?
The quickest way to do this is to make some easy improvements. These could include improving the landscaping, painting the exterior of the house, and upgrading the front door. These won’t give huge boosts, but they can help.
If you have a bit more money and time, renovations such as upgrading fixtures, replacing cabinets, or adding more square footage can make a difference.
While appraisers will look at nearby sales, you can provide a few comps that are favorable. It can help if an appraiser may have overlooked a property and can help you get a higher figure.
Why Do Appraised Values and Market Values Differ?
Appraised values are determined by a single person. While they follow a system, there is still some room for opinion and estimates. One appraiser can give a higher or lower value than another.
There are also factors that play into market value that might not affect appraisal. Perhaps you’re selling at the right time, and you have a dozen competing offers to drive the price up. Or, perhaps the nearby comps are all several months old, and the market has heated up or cooled off since then.
