When a family is ready to purchase or sell a home, determining the home’s value becomes a top priority.

Property value shows buyers how much to pay, lenders how much to loan and sellers how much the listing price of their home should be.

However, properties have an appraised and market value, and buyers and sellers must understand both for successful real estate transactions.

Read on to learn the key differences between a home’s appraised value and its market value to make the best decisions along your homebuying or selling journey.

What is appraised value?

The appraised value is necessary for determining your mortgage loan amount.

To get this value, a licensed appraiser will evaluate the property based on specific criteria, including:

• Property condition inside and out
• Size and layout of the home
• Similar properties in the area that have recently sold (comparable sales)
• Location and proximity to schools, public transportation and other amenities
• Updates, upgrades or renovations that add value, such as a new roof or energy-efficient features

Appraisers are third parties separate from the buyer, seller or lender. This allows them to give an unbiased opinion of value rooted in facts and data.

Purpose of appraised value

Appraised value helps lenders provide the right loan amount for a property and helps buyers ensure they are not overpaying for a home.

What is market value?

Market value in real estate is essentially what buyers are willing to pay for a home and what sellers are willing to accept.

The market value is typically determined based on the following factors:

• Market conditions, including whether a buyer’s or a seller’s market is currently in effect
• Comparable sales
• Buyer perception
• Property presentation

An experienced real estate agent can help buyers and sellers understand market value and how it influences the purchase or sale of their property.

Purpose of market value

Market value helps sellers find the sweet spot between setting a fair price and earning a profit. It also helps buyers avoid paying more for a home than it is worth.

The main differences between appraised value and market value

You’ve probably noticed some similarities between appraised value and market value, including how they both help buyers not to overpay for a property.

Let’s now look at the main differences between the two values to understand their role and importance in your transaction.

How they’re used

• Appraised value is mainly for the mortgage lender. It helps them ensure that the property is actually worth the amount they are lending.
• Market value helps sellers set the list price and lets buyers decide how much they want to pay for a property. Real estate agents rely on market value to match properties to prospects and when making offers.

Objectivity vs. subjectivity

• Appraised value is more objective because it’s based on specific criteria rather than market trends or opinions.
• Market value is more subjective and may not match the appraised value. For example, a seller may list a property higher because a renovated kitchen with eco-friendly features is popular in that particular neighborhood. Likewise, a buyer may be willing to pay more for specific features or amenities that an appraiser would not consider significant.

Market influences

• Appraised value is considered more “stable” than market value due to the set criteria, but it also may not reflect all of the factors that market value does. For example, an appraisal may not always reflect the most recent data if home prices are rising rapidly in a neighborhood.
• Market value is more unpredictable and can incorporate even the most current market conditions, such as competitive or slow markets.

Impact on your purchase or sale

• Appraised value can affect a buyer’s ability to get a mortgage if it comes back lower than the purchase price. In that case, the buyer may have to make a higher down payment, renegotiate the price with the seller or even walk away from the deal.
• Market value influences a property’s listing price, the buyer’s offer and the final sale price. Competitively priced homes based on market value are the most likely to be sold quickly. Buyers use market value to determine how they will negotiate with the seller.

A reliable team, including a trustworthy lender and reputable real estate agent, can make the homebuying process much smoother for buyers and provide the right level of support.

Common misunderstandings regarding appraised and market value

The similarities and differences between appraised and market value can be confusing and can lead to certain misunderstandings over time.

Here, we disclose—and dispel—some of the most common myths about appraised value relative to market value.

Myth 1: Appraised value and market value are the same thing

In discussing value, some people believe that both figures should be identical. This can be frustrating when they are not.

It’s normal for these values to differ because they serve different purposes in the homebuying process.

Myth 2: Appraised value sets the sale price

Some buyers and sellers believe that properties should be sold at the appraised price.

While the appraised value is a helpful benchmark, the ultimate sale price is based on what the buyer is willing to pay and what the seller is willing to accept.

Myth 3: Market value is more important than appraised value

Some people can take market value too far and believe that appraised value doesn’t matter as long as buyers will pay whatever the market dictates.

However, this belief becomes challenged because lenders rely on the appraised value to set the loan amount.

Ultimately, it’s important to remember that both values impact the sale.

What to do when these values are different

There are a few things that can happen when appraised value and market value don’t align:

• If the market value is higher than the appraised value, the buyer must decide whether they can make up the difference in cash or need to renegotiate the price.
• If the appraised value is higher than the market value, the buyer may have an easier time getting their loan approved or may decide to negotiate additional concessions from the seller. They also must consider the future home value if market conditions are weakening.

Compass Mortgage: Your partner and advocate in homebuying

As a homebuyer in a competitive market, nothing is more important than a competitive offer. 

A loan commitment from Compass Mortgage allows your real estate agent to submit an offer that stands out from the rest. Get a fully underwritten loan commitment and lock in your interest rate before you start your house hunt.

Put yourself in the best position. Start here with our distinctive Get Committed® program to act quickly when you find your dream home.