Appraisal value and market value are both important types of property values in the real estate world, particularly in buying and selling properties (among many other purposes). They are similar, but as an appraiser, one of your first lessons is to have a full grasp of their differences! So, appraisal value and market value: are they apples and oranges? Or two peas in a pod? Let’s find out!
Important Definitions
Appraisal Value
Put simply, appraisal value is the value an appraiser determines a given property is worth. Using valuation methods and data, the appraiser provides an estimate of what the market value of the property is, based on that collection of research and analysis. Most of the time, this data reflects the local market and surrounding properties.
| The appraisal value of a property is useful for many purposes, like: |
|---|
| Tax assessments |
| Estate planning |
| Mortgage financing/refinancing |
| Investment projects |
| Legal proceedings |
Market Value
Market value, on the other hand, is the theoretical value of a given property, in the most ideal market setting. That means an open market where buyer and seller mutually agree on a price without added pressure to buy or sell, and they do so with full knowledge of the property. Market value is not a set value by any person or organization. Instead, it’s the value as it plays out in the market between buyer and seller; so, you won’t know the actual market value of a property until it is agreed upon by buyer and seller, under ideal conditions.
| Examples of ideal conditions in which market value can be found include: |
| A comprehensive home inspection has been completed on the property |
| Both parties in the transaction are transparent and well-informed on the property |
| Real estate agents in the transaction have expert knowledge of this market |
| The property has been appraised |
It is possible for a buyer and seller to agree on a price without favorable conditions. In this case, the final price of the home may not accurately reflect the market value. That's why this concept is considered “theoretical.”
Think about it this way: Let’s say a home is sold for $500,000, but later, we find out the home has excessive termite damage and is about to collapse. The sell price probably doesn’t accurately reflect its market value, since these major issues weren’t disclosed or discovered during negotiations. It’s like selling a candy bar wrapper with a chunk of cardboard inside, where the chocolate should be. To best understand the importance of market value, we’ll assume favorable conditions are met.
| Here are a few reasons you might need to use market value: |
|---|
| To set a listing price when selling a home |
| To get an idea of a potential return on investment (ROI) |
| To negotiate a fair price when buying a home |
| To get a pulse on market trends |
| To appropriately time buying and selling investments |
Appraisal Value & Market Value in Action
Let’s say Ann lists her home for $350,000, after assessing her property and the current market conditions with her real estate agent. Lots of homes are selling in this price range, but they’re aiming high to make room for negotiations. This is the list price.
A buyer, Margaret, comes along and applies for a mortgage loan to buy the home. The lender sends an appraiser to find the value and see how much they should lend. After a thorough analysis, the appraiser determines the appraisal value — $310,000.
After some negotiations and with a comprehensive, transparent understanding of the property and its market, Margaret and Ann agree that $340,000 is a fair price for the home — this reflects its market value.
Impact of Appraisal Value & Market Value on Real Estate & Finance
As you may have gathered, appraisal value and market value aren’t always the same. Sometimes, depending on market conditions, there can be a pretty big gap.
How Appraisal Value Impacts Buying or Selling a Property
In a super competitive market, the market value might be higher than the appraisal value. Or, in a slower market, the appraisal value might be higher than what homes are actually going for. This is where negotiations come to play, and why it’s challenging to pin down what the market value of any given property might be, until the transaction takes place.
How Market Value Affects Real Estate Investment Decisions
Because of their theoretical nature, market values are more helpful than appraisal values at predicting good potential investments. The appraisal value is more of a snapshot based on the property, similar properties, and data from past transactions. This information on its own can’t tell us, for example, how popular a particular area or development will be the way market values can. Investors keep a close eye on changes in the market and which areas are growing, and try to make smart guesses based on those trends. In this sense, market value is a great way to find the pulse, and follow the money!
How Appraisal Value & Market Value Impact Lending Decisions
Because of the risk involved in the lending business, both appraisal and market values are vital. Lenders don’t want to throw money out the window, especially if market trends suggest things are slowing down. High risk properties, like those in high-crime areas, are likely to get more conservative loan offers than those perceived less risky after an appraisal. It's the same for high-risk properties in a quickly sloping market, as suggested by market values, and vice versa.
The Role of Market Value in Determining Property Taxes
Depending on your local government, either the appraisal value or market value of a property (or a combination of both!) is used to determine property taxes. To do so, they use an assessment ratio and plug it into this formula:
Market Value (or Appraisal Value) x Assessment Ratio = Assessed Value
Then, the assessed value is multiplied by the local tax rate to determine how much the annual property tax will be.
So, the higher a home’s market value or appraised value, the higher property taxes are likely to be. If either of these values goes up, the taxes will follow. Reassessments are usually done on a regular basis, but these details are always determined by the local government.
What Can We Assess About Appraisal?
Appraisal is a career rich with opportunities for critical thinking, solving problems, compiling and comparing facts, and making educated judgment calls. It’s a chance to make a real impact in your community. And if you’re still reading, it might just be the path for you.
Learn more about building a career in appraisal.
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