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Today I’d like to discuss the difference between Market value and Appraised value. The topic is particularly relevant right now as the lending guidelines are constantly changing. Market Value, according to the Appraisal Foundation, is “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
Now of course, that’s quite technical, so let’s simplify this definition a little. Market Value assumes that the buyer and seller are both motivated, both parties are well informed and advised and acting in their own best interest. Market Value also assumes a reasonable marketing time for the property on the open market and for a normal (non-distressed) sale.
Appraised Value on the other hand, is the only valuation number a lender can use to determine the value of a piece of real property submitted by a licensed appraiser. Keep in mind that “appraising a parcel of real property” is an art, not a science and is most often used for financing purposes.
Appraised value considers what similar properties have sold for in the same neighborhood in the last 90-180 days. Appraisers will also consider the gross living area (+/- 15%) and consider going outside the development if no other suitable comparables exist. They will also take into account amenities, views and updates to the property.
The problem with appraised value versus market value is particularly relevant when a market is appreciating. Sometimes the values 90-180 days ago may not be representative of what buyers are willing to pay today or what sellers think that they can get today. This value is called Market Value or what a buyer is willing to pay for the property. Interestingly, when market value and appraised value differ on a real estate transaction with financing involved, the lender will only finance based on appraised value.
However, the buyer may have to consider coming to the table with additional funds to meet the market value demanded by the seller. Essentially, the buyer and seller will need to overcome this disparity if it exists in order to successfully close the transaction. Hopefully this has shed some light for you on the difference between Market Value and Appraised Value. Thanks again for tuning in – we’ll see you next time.
Now of course, that’s quite technical, so let’s simplify this definition a little. Market Value assumes that the buyer and seller are both motivated, both parties are well informed and advised and acting in their own best interest. Market Value also assumes a reasonable marketing time for the property on the open market and for a normal (non-distressed) sale.
Appraised Value on the other hand, is the only valuation number a lender can use to determine the value of a piece of real property submitted by a licensed appraiser. Keep in mind that “appraising a parcel of real property” is an art, not a science and is most often used for financing purposes.
Appraised value considers what similar properties have sold for in the same neighborhood in the last 90-180 days. Appraisers will also consider the gross living area (+/- 15%) and consider going outside the development if no other suitable comparables exist. They will also take into account amenities, views and updates to the property.
The problem with appraised value versus market value is particularly relevant when a market is appreciating. Sometimes the values 90-180 days ago may not be representative of what buyers are willing to pay today or what sellers think that they can get today. This value is called Market Value or what a buyer is willing to pay for the property. Interestingly, when market value and appraised value differ on a real estate transaction with financing involved, the lender will only finance based on appraised value.
However, the buyer may have to consider coming to the table with additional funds to meet the market value demanded by the seller. Essentially, the buyer and seller will need to overcome this disparity if it exists in order to successfully close the transaction. Hopefully this has shed some light for you on the difference between Market Value and Appraised Value. Thanks again for tuning in – we’ll see you next time.
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