Appraised Value vs Market Value: What’s the Difference?

Are you curious about how to determine the home value of your current home or the home you want to purchase? 

To use a metaphor, home value is closer to an op fen-air bazaar with negotiations and price haggling rather than a discount store with fixed sticker prices. Moreover, a home’s value changes over time—and if you want to better understand how to increase home value, it is important to know that it is most clearly illustrated by what a potential buyer is willing to pay for it. 

In the absence of closing on a sale, however, property value is ultimately an estimate. And that estimate can change depending on who calculates it and what they base those calculations on. 

Below we’ll address the difference between the two most common approaches to evaluating your home’s value and how a sell and stay transaction can help you get there. 

What’s the Difference Between Appraised Value and Fair Market Value?

Let’s start with the basics: is appraisal value the same as market value? 

No. And one of the main differences between appraised and fair market value revolves around who provides you with the estimate, and what their legal role is.

Two main parties can play a role in estimating a home’s worth:

• Real estate agents – A real estate agent calculates fair market value based on a comparative market analysis, which they then communicate to a property owner. While a real estate agent should work within legal and ethical bounds, as a representative of the homeowner they ultimately have a portion of their commission at stake. 

• Home appraisers – The role of a home appraiser is neutral regardless of who hires them. Home appraisers may be enlisted by homeowners, mortgage lending companies, or potential buyers to evaluate a property’s value. Licensed appraisers have a duty under federal law to generate an objective value of the home, regardless of any financial or personal gains they stand to make from their home appraisal.

Regardless of who conducts an appraisal, the process may involve reviewing market trends, neighborhood characteristics, detailed site visits, and measurements to complement a comparative market analysis. 

Can Appraisal Value Be Less Than Market Value?

Market value is generally considered the foundation for setting a listing price for the seller. For most buyers, however, appraisal value is key for unlocking a mortgage loan. 

Ideally, lenders want to find buyers who will pay their mortgage in full and on time until their debt is repaid. If that plan falls through, the loan is secured by the property itself, and the lender can resell it to recoup their lost mortgage payments. 

In this scenario, lenders want to know that they’ll be able to sell the property for enough money to offset the lost loan payments (and the legal and administrative costs of putting a house back on the market). This is why it’s unwise for lenders to loan more money than a house is worth—even if the potential buyer is willing to pay a premium in a tight housing market or during a bidding war. 

With that in mind, traditional lenders limit the amount of a mortgage loan to a percentage of the appraised value (usually 80% to 97%), which is the loan-to-value ratio (LTV). The remainder is paid directly by the buyer’s down payment.

Since lenders calculate value based on the lesser of the appraised value or sales price, that means an appraised value lower than market value could result in a buyer: 

• Walking away due to a loan falling through
• Paying cash to make up the difference between the appraised value and the sales price
• Ending up with an LTV over 80%, which requires paying for private mortgage (PMI) 

Do Appraisers Typically Appraise for Selling Price?

In a balanced housing market, appraisals often come in close to or a bit over the selling price. Currently, the US is gradually coming out of a hot seller’s market where the number of buyers outpaced available homes significantly. This has resulted in: 

• Fast-rising home prices
• Bidding wars between potential buyers driving prices even higher
• Buyers willing to sign offers without adequate home appraisal contingencies

Over the past several years, it’s been more common for appraised values to come in under sale prices. Many buyers have had to pay out of pocket to make up the difference, or lost their deposits after walking away from a sale they couldn’t finance.

Truehold: Access Your Home’s Equity Without Moving

Buying a home can be the largest financial investment of your life, but it’s one that most people don’t know how to take full advantage of. You need a home to live in, after all, so you have to choose between the money or the property—right? 

Not so. With Truehold's sell and stay transaction, you can complete a sale on your property and turn your home equity into cash without moving. 

No more worrying every time the weather turns, or shopping around for a replacement when an appliance gives out. With Truehold, you can free up money to travel, buy anew home, pay down debts, or invest in a new business, all while staying in your current home as a renter. To learn more and get a value estimate, reach out to one of our representatives to get started today.

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Sources: 

1. The Balance. What Is a Maximum Loan-to-Value (LTV) Ratio? https://www.thebalancemoney.com/maximum-loan-to-value-ratio-5204567

2. Forbes Advisor. Should You Pay Above The Appraised Value Of A House? https://www.forbes.com/advisor/mortgages/should-you-pay-above-the-appraised-value/