How do you explain market value vs appraised value to buyers?

Market value is what the home is being sold for, contractually. Appraised value is the value of the property as determined by the appraiser based on their "opinion of value" based off of price per sq ft, comparable sales, and other key factors which compose a homes appraised value.

The market price is the sold price. In determining value there are several influences. A Comparative Market Analysis (CMA) is a report a real estate agent prepares that typically has a range in value and helps the seller set the "list price". An appraisal value is a valuation an appraiser determines for lending purposes. The CMA and the appraisal use data of similar sold properties in the area with in the last 3 -6 months. Both numbers should be relatively close however if the market is in flux either going up or down the numbers from the past sales may not align with the current market. Therefore, the market value is the price a buyer is willing to pay.

Market value is essentially what a buyer is willing to pay for a property, based on demand, neighborhood trends, and current conditions in the real estate market. It reflects the price you and the seller agree upon during negotiations.

For residential real estate, the most common approach to value is the Sales Comparison Approach which compares the components of value with recently, similar properties. This approach is based on the concept of substitution. If needed, appraisers are skilled at merging approaches if the property conditions warrant consideration (ie. income from a second unit). This field was born from the economic turmoil of the stock market crash of 1929 when homeowners who owned houses, were employed but the speculative investing contributed to an economy collapse in 1929. Many people lost everything. People could no longer pay their mortgages and banks foreclosed. Banks needed a way to value property, the appraisal field began, so homes could be sold.

Appraised value is determined by a licensed appraiser and represents an independent estimate of the property’s worth. This evaluation is based on factors like the home's condition, recent sales of similar properties, and the local market. The appraisal is crucial because lenders use this value to determine the maximum amount they are willing to loan.

The market value/price is the sold price. The Comparative Market Analysis (CMA) is typically a range of value. Both the Market Value and the Comparative Market Analysis is "trailing" the market. As a first time buyer you need to know changes in demand, economic conditions and nuances in the housing market from the trailing period. This can be tracked nationwide, yes, but most important ...What is happening locally? The prices and values are closely within a few percentage points of each other. This can have a big impact on the bottom line for you first time homebuyer. Read about the economy, ask questions, take a class, get your head around housing demand before you pick up the phone for a pre-approval letter or visit an open house!

📣📣 First Time Home Buyers - when you are looking at homes - each time you go to look at a home you should be taking notes and computing the value components of a house so that you understand what is going on in the market. Then when you work with a real estate agent, hands down - you should have your agent prepare a CMA for you. Now in some cases you may not need it because you know it - but in other cases - ask for it to be done. This is also an interview question when looking for a real estate agent!

One of the most common methods is looking at recent sales of similar homes in the same area. These 'comps' give a sense of what buyers are paying for properties with similar features, like size, age, and condition.

First Time Buyers, there is a process by which you can ask for a re-review of an appraisal however, before you question the integrity of the appraisal report - look carefully at the components of the report - see the valuation criteria the appraiser is utilizing and the comparable sales. A re-review may be worthwhile if there are multiple houses that closed between the time of the issuance of the appraisal report and your closing but, the appraisers have this pretty dialed in - so know your market and know the components of value. Empower yourself!

Definition: Market value reflects what buyers are willing to pay, while appraised value is determined by a professional appraiser based on property condition and market trends. Purpose: Appraised value is primarily used for mortgage lending; market value is crucial for real estate transactions. Influence: Market value can fluctuate based on demand, whereas appraised value is more static and influenced by specific property assessments. Example: A home listed at $300,000 may have an appraised value of $280,000, leading to negotiations between buyer and seller. Preparation: Buyers can enhance appraised value by providing documentation of upgrades and improvements, ensuring a favorable appraisal outcome.

As a first time buyer, the only way you can prepare for an appraisal is to know the market before you make your offer and know the components of value. This is not part of the market pressure you may feel when talking with your real estate agent. FYI - The banks do not directly "hire" the appraiser off some list they have internally, they submit an order and it goes through a 3rd party so, there is complete transparency and a level of professionalism that is built into the process. It's a very good idea to educate yourself first time homebuyer because this is one of the most expensive single items you will ever purchase. If you educate yourself you will enter into the homebuying process with confidence!

📣First Time Buyers📣 One component of value that is not typically discussed are the grey areas of an appraisal report. Yes of course there are grey areas - No two houses are alike right? Neighborhoods, location, external obsolesce, these are factors that can influence value - One time I had a buyer call me after the closing - about 3-4 months - (I was representing the seller) and he was mad because the freight train that ran behind the house sat on the tracks for hours. Now this was not anyone's fault. The train had been there for 70 years. External obsolesce are component of towns such as this - Look around when you are a buyer. You need to do your research. States allow Buyer Beware laws! Educate yourself. There is help out there!