Market vs. Appraised Value in Real Estate: What The Two Figures Represent

A homeowner in Des Moines, Iowa, puts a four-bed, 2.5 bath house on the market for $270,000. The house has a fenced-in yard, sunroom, and large basement. A buyer comes in and offers $270,500 for the property. An appraiser assigns the property a value of $272,000. And the county assesses the same home at $255,400 for property taxes.

In this scenario, what’s the difference between the home’s market value vs. appraised value? And why is the assessed value so much lower than the other assigned values?

Using the example above from a real-life transaction from 2018 (courtesy of one of our own staffers at HomeLight!), we’ll break down the meaning of each type of value and how it’s calculated.

Know the value of your house when comparing market value vs appraised value real estate
Source: (boonchoke / ShutterStock)

The home’s market value: $270,500

“Market value is simply what a buyer is willing to pay for a property,” explains top-selling Antioch, California, real estate agent Rick Fuller. So in our case study, the amount of $270,500 offered by the homebuyer represents the home’s market value.

A home’s market value is influenced by factors such as:

Comparable sales

Your property value doesn’t exist in a vacuum. It’s influenced by the surrounding area and “going rate” for nearby homes that share a lot of characteristics with yours.

“Market value is best determined by what a buyer was willing to pay for a property like it in the past,” Fuller explains. “So we find comparable properties that have sold recently to estimate what a buyer is likely to pay for our property.”

This is done through a comparative market analysis (CMA), a report real estate agents create to help sellers price their homes.

For the property in our example, comps would include any homes sold within the past 3 to 6 months with about 4 baths, 2.5 baths, and approximately 1,900 square feet.

Maybe one comp is $260,000, but it doesn’t have that extra half bath. Another house is $280,000 but has newer floors and appliances. These types of comparables would give you a value range for the property that can be fine-tuned into an exact price.

Inventory levels and local buyer demand

In Economics 101, you learn that a market of any kind is influenced by the laws of supply and demand. We’re seeing the effects of supply and demand on lumber pricing in the wake of the coronavirus pandemic. Labor scarcity and production delays have caused a lumber shortage (supply) as home renovations skyrocket (demand). That’s made it really expensive to complete wood-heavy projects like decks.

You’ll see the same forces influence the market value of your home. If your market has a low supply of homes as buyers come out in droves due to great mortgage interest rates or a new employer in your city, home values will likely rise.

The opposite is true in a buyer’s market where few buyers are chasing a surplus of homes. Most recently we saw this on a large scale post-2008 when builders produced too much housing in anticipation of demand that collapsed under the subprime mortgage crisis.

A home’s unique features, amenities, and condition

Houses are tricky to value because they’re so unique. A spacious laundry room, great curb appeal, and hardwood floors could make one house more valuable to a buyer than the next.

Even if a row of houses in a new development begins as completely cookie-cutter, over time the owners of those homes will update the properties at different rates. Some will build additions or make consistent upgrades; others will neglect basic maintenance. A house with a new roof is going to sell for more than one that won’t pass inspection.

In our example property, the market value of the home ($270,500) came in at $500 above the seller’s list price of $270,000. It’s an interesting illustration of the market influencers above: Due to a low inventory seller’s market, the buyer decided not only to make a full-price offer but to tack on an extra $500 in an effort to impress the seller right away and stop them from fielding additional offers.

A three-seasons sunroom and fenced backyard were must-haves for the buyer and not a guarantee for the area — these unique features also created a sense of urgency, resulting in the home selling above asking price.

Some other keys points to note about market value include:

  • Market value is assigned in the sale of a home to a third-party or an arm’s length translation. A transaction between parties who know each other, like parents and their son or daughter, isn’t technically “market value” because the parents might be inclined to give their children a discount.
  • Market value assumes that the buyer and seller are “typically” motivated — in other words, neither is desperate for the deal to go through to the extent that it would impact the value.
  • A “market value” sale can only occur when the buyer and seller are knowledgeable of the relevant facts, such as the history and condition of the property.
Your appraised house matters when comparing market value vs appraised value real estate
Source: (ronstik / ShutterStock)

The home’s appraised value: $272,000

So the seller listed at $270,000, the buyer offered $270,500, and the appraiser says: “I think this house is worth $272,000.” How does that work?

While market value is determined by what a buyer is willing to pay for a home in a free and open market, the appraised value is the opinion of a single professional appraiser.

What goes into an appraisal?

Appraisers who are trained and licensed in the profession must follow the Uniform Standards of Professional Appraisal Practice set by The Appraisal Foundation and the Appraisal Institute who created the umbrella of requirements for valuing homes.

Appraisers most frequently use the comparable sales method (similar to a real estate agent’s comparative market analysis) along with an onsite visit of the property to come up with an opinion of value. That opinion is drafted in the form of an appraisal report, the most common of which is the Uniform Residential Appraisal Report.

Lender appraisal requirements

If the buyer of your home is financing their purchase with a mortgage, the lender will require a third-party appraisal to verify that the contract price is valid. In our example, $272,000 is $1,500 above the contract value, so the buyer and seller were in the clear to move forward.

If the appraiser had come up with a value under $270,500, then either the buyer would need to bring additional funds to the sale, or the seller would have to agree to reduce the price. In a real estate transaction, an appraisal essentially protects the lender and the buyer from overpaying for the house.

A pre-listing appraisal can help pinpoint market value

Sometimes an appraiser’s services are used to determine the market value of the home prior to listing. For example, in a situation where a property is especially unique or in an area with a lack of comps, an appraiser could use alternative valuation methods like replacement or income to accurately price the property.

But whether it’s a real estate agent or an appraiser pricing the home, they both have the same goal: To pinpoint the home’s market value. With our case study, the real estate agent did a spot-on job pricing the property with an appraisers’ lens, with only a $2,000 price differential between the list price and appraised value. This created a smooth path to closing. So if you’re wondering what your house will appraise for but don’t want to pay $500 for an appraisal, a top local real estate agent is your best bet.

The third type is assessed value, something to consider when comparing market value vs appraised value real estate
Source: (Ann Wallace / Unsplash)

The home’s assessed value: $255,400

OK, so we’ve covered a home’s market value (what a buyer would pay) vs. appraised value (a professional appraiser’s opinion). There is yet a third type of home value assigned to your property, and it serves one main purpose: To calculate and levy property taxes.

Your local county assessor will be the one to determine your assessed property value. If yours comes in way below market value, that’s normal. In the case of our West Des Moines house, the assessed value of $255,400 is a lot less than what it sold for.

Assessors conduct ‘mass appraisals’

The reason for that has to do with the way that town assessors value the property. As one Board of Assessors in the state of Massachusetts puts it, appraisers assign value to one property at a time. Assessors conduct “mass appraisals”, which doesn’t grant as much flexibility to account for factors like a view, positioning on a corner lot, and the great layout of the property.

“Assessors are generally bound by more rigid objective measures such as the type of house (colonial, ranch, etc.), square footage, finished area, the number of bedrooms and bathrooms, age, grade, and condition,” the Assessor Board writes.

Don’t be sad about a low assessed value. Property taxes are calculated by multiplying the local government’s tax rate (aka mill levy) by your assessed value. The lower the assessed value, the less you pay in property taxes.

You can appeal your assessed value if it looks high

Depending on where you live, there is a chance that swiftly increasing market values could significantly increase the assessed value, resulting in a higher-than-expected tax bill. If you feel that an incorrect assessed value is contributing to your too high property taxes, it is possible to challenge the assessment.

You just need to check your state’s property laws. Many states have laws in place to prevent assessed values from increasing too quickly and to correct the assessed value if you live in a declining market where home values are decreasing.

“In California, there’s a cap on property tax increases, which means that they can only increase the property tax by 2% per year,” explains Fuller. “Also, California’s Prop 8 is used in a declining market, or if the assessor has assessed the property inaccurately. When that happens, the homeowner can challenge the assessed value. Then the assessor will reassess the property and reduce the assessed value, which will reduce your property taxes.”

There is more to market value vs appraised value real estate
Source: (Atstock Productions / ShutterStock)

More to a home’s ‘value’ than meets the eye

Let’s review some key takeaways in this guide to market vs. appraised value:

  • The market value of your home represents what a third-party buyer (so no friends or family) would pay for it.
  • Your agent will recommend that you price your home at market value based on comparable sales.
  • Your list price, however, is not the same as the market value. Technically you can list your home at whatever price you want, but that doesn’t mean buyers will bite.
  • Unique home features or a seller’s market could entice buyers to bid slightly over market value if your list price is reasonable.
  • If your buyer needs a mortgage, the lender will require an appraisal. If the appraisal doesn’t meet or exceed the contract price, you and your buyer will have to figure out how to make up the difference.
  • Your agent has the appraised value in mind when they help price your home. Because agents have done hundreds of CMAs, they can often price within a few dollars of the appraised value.
  • Your assessed value may be lower than your appraised value or they could be similar. But keep in mind that your house is one of many that the town assessor will assign value to, making it difficult to account for special features and upgrades.

All this talk about value probably makes you curious about how much your house is worth at this very moment. Satisfy your curiosity by requesting a free Home Value Estimate with our tool that combines housing market data with your own insights about the property.

Header Image Source: (Jacques Bopp / Unsplash)