Appraised Value Versus Market Value: How Appraisals Work

In the world of real estate, appraisals play a crucial role in due diligence for property buyers and lenders alike for every real estate transaction. During an appraisal, a licensed professional appraiser visits and assesses the overall value of a property based on various factors.

Whether you’re buying or selling a single-family home, refinancing a mortgage, or considering an investment in a multi-unit property, you need to understand the concepts of appraised value and market value.

But how do appraisals work, and what are the differences between appraised value and market value? Strap in for those and other questions about appraisals for real estate investors.

How Do Appraisals Work?

Anyone who has taken out a mortgage to buy a home has usually worked an appraiser. Typically, the mortgage origination process with a lender includes hiring a professional appraiser to assess a property’s appraised value before they agree to fund a home or investment property loan. But that’s not the only situation that calls for an appraisal.

The primary purpose of an appraisal is to provide an unbiased opinion of a property’s worth to ensure fair transactions, determine property taxes, or mitigate risk for lenders.

The appraisal process begins with the appraiser conducting a visual inspection of the property, noting its size, condition, layout, and notable features. Next, the appraiser researches recent sales of comparable properties in the area (known as “comps”) to determine the property’s value based on the current market. The appraiser then prepares a detailed appraisal report and assigns a total estimated valuation to the property.

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

Although they sound similar, appraised value and market value are not the same. Real estate investors must understand both figures and when the two values might differ.

What is Appraised Value?

Appraised value is the estimated value of a property as determined by a certified real estate appraiser. Professional appraisers consider factors like the property’s location, square footage, floor plan, age and condition, plus recent sales of comparable properties and current market conditions to arrive at an estimate of its total value. The appraised value serves as a reference point for buyers, sellers, and lenders during real estate transactions.

Although appraisals aim to provide an objective evaluation, it’s important to note that appraised value is not an absolute or fixed figure but rather an estimate based on professional judgment and analysis. Different appraisers’ professional opinions or changing market conditions can lead to variations in the appraised value of a property.

What is Market Value?

Market value of a property, on the other hand, reflects the selling price a buyer and a seller agree upon in the real marketplace. Supply and demand, economic conditions, current market trends, the local real estate market, and buyer preferences can all cause market value to fluctuate, as in any competitive marketplace.

For example, your master bathroom having outdated harvest gold fixtures probably won’t affect your appraised value at all, but if it’s ugly enough to turn off buyers it could influence the market value of the home.