Two separate metrics are often used when discussing the value of a home: the appraised value vs. market value. Many homeowners often wonder what the difference is between the two and which one matters most. The truth is, however, that they both play an important role in your real estate transaction.
With that in mind, below is a guide for sellers on how to distinguish the appraised value of a home from its market value. You'll learn what each of these terms means, how they're determined, and what you can do to get the most value out of your home.
What is the market value of a property?
In real estate, the market value of a property is determined by how much prospective buyers are willing to pay for it in the current market. In other words. It's the same as the purchase price that's proposed when a buyer submits an offer on the home.
Typically, when buyers decide on a proposed sale price for a property, they take the following factors into consideration:
The asking price
Usually, buyers will look at your home's asking price as a starting point for the negotiations. They will then decide to offer a contract price that may be higher or lower based on their overall impression of the property.
For the most part, by the time buyers are ready to submit an offer, they've been on a few showings. This means they've seen a few other homes that are currently on the market and are likely similar to your own. When making their offer, they'll be weighing how your home stacks up to the competition.
The condition of the home
Condition is another big factor in determining the proposed selling price. In buyers' minds, they're budgeting how much money they would have to put into the property if they ended up buying it. That said, homes that need more TLC are likely to receive lower proposed purchase prices than homes that are more up to date.
The interest in the property
Buyers will also weigh their own level of interest in the property as well as any perceived interest of others when making an offer. For example, a property that has multiple offers on it is far more likely to receive a purchase price that's over asking than a home that's been sitting on the market for a while without experiencing much activity.
What is the appraised value of a property?
Once your home is under contract, it will likely have to undergo an appraisal. Mortgage companies require appraisals because they want to verify that the home is worth the proposed purchase price. They do this in order to make sure they'll be able to sell the property to cover any losses in the event that the buyer defaults on the loan.
An appraisal is done by a third-party professional who is licensed or certified in your state. These appraisers are trained to determine your home's value without showing any bias and to be able to substantiate their claims.
For their part, your licensed appraiser will look at the following factors before making a determination:
The neighborhood where your home is located will have an impact on its value, as will where your home is situated in the neighborhood. However, in addition, external factors such as the crime rate, school district rating, and walkability score will also play a role.
Obviously, homes with more square footage will be given a higher value than homes with less, but the way in which the space is distributed will also have an effect. Properties with more usable and livable space will be weighted more heavily.
Number of bedrooms and bathrooms
As the number of bedrooms and bathrooms increases, so will the home's value. That said, when comparing your home to others in the area, the appraiser will make an effort to use properties that have the same number of both.
Age and condition
On the whole, older homes are considered riskier than newer homes because they are more likely to need costly repairs. However, just because a property is older doesn't necessarily mean it will receive a lower valuation. The way in which the property has been maintained will also be considered.
Updated homes are generally considered to be worth more than homes that are starting to show their age.
Comparables are arguably the most important factor on the list. The appraiser will take a look at other, similar properties that have recently sold in your area and use those to provide the baseline for your home's value.
Why do the appraised value and the market value of property sometimes differ?
Put simply, the appraised value and the market value of a property are sometimes different from one another because, as you can see from the above lists, they are determined by different factors. In addition, the home's market valuation is often much more subjective because it's largely based on the buyer's opinion of the property.
That said, one value does not necessarily outweigh the other. While it's important to receive an appraised value that meets or exceeds the market value in order for the buyers to be able to be approved for their mortgage, the market value is equally important to the sellers. The market value tells them how much money they can expect to earn from the sale of their home in today’s market.
Best ways to improve the market value of a property
Unfortunately, since the market value of your home is so subjective, there isn't much that you can do to guarantee receiving a particular price point. That said, it never hurts to put your best foot forward. Below is a list of things that you can do to help encourage higher offers.
Take the time to depersonalize
When showing your home, your goal should be to encourage buyers to picture themselves living in the property. That can be difficult for buyers to do, especially if you leave a lot of personal items throughout the home. In light of that, take some time to remove personal items including family photographs, religious items, and any decor pieces that advertise a strong personal taste.
If you want to take things a step further, consider staging your home while it's on the market. According to the 2019 Profile of Home Staging by the National Association of Realtors (NAR), 39% of agents felt that staging properties led to a higher dollar value for the property and 53% felt that staging decreases the time spent on the market.
Lastly, although it sounds simple, take the time to tidy up before any showings. While unmade beds or dishes in the sink shouldn't affect buyers' opinions of your home, it does happen. With that in mind, a little elbow grease can go a long way toward making sure that your home makes its best possible first impression.
How to improve the appraised value of property
On the other hand, if you're worried about the appraised value of your home, there are some things you can do, as the property owner, to weigh the odds in your favor. They are as follows:
Make minor fixes
Most homeowners have a list of minor home repairs that they intend to get around to fixing when they have some free time. If you have one of those lists, too, it might be worth your while to take care of them before your appraisal. While refreshing chipped paint and fixing a dripping faucet won't necessarily add value to your home, they can help improve the appraiser's impression of the condition of the property.
Spruce up the outside
While you're working to get the inside of your home into top shape, don't forget to take care of the outside as well. To that end, it can help to make sure that the lawn has been freshly mowed, that any hedges have been trimmed, and that the gutters have been cleaned out in time for the big day.
Gather your paperwork
Once your house has been taken care of, gather any paperwork that you think might be of use to the appraiser. While the exact paperwork will vary for everyone, it could be a floor plan that outlines your home's square footage, a plot of land survey to show your acreage, or a list of any recent improvements you've made to your home, as well as their cost.
Ask your agent to provide comparables
Lastly, since comparable sales provide the baseline for your home's value, it's crucial to ensure that you're using appropriate properties for the comparison. To that end, ask your real estate agent to provide some comparables for the appraiser. While the appraiser will not be required to use them in making his or her determination, it never hurts to provide information on comparable homes.
The bottom line
While the appraised value and market value of a home are two separate metrics, they both play an important role in real estate sales. To that end, as the seller, you can use the information above to help ensure that your home garners its highest possible value. With any luck, you'll be able to use the proceeds from the sale of your home to your advantage.