The difference between market, appraised, and assessed value
Pinning down the value of a home can be a tricky process. The building and its land will be worth a certain amount of money, but this value is largely determined by demand in the neighborhood. A house in the competitive San Francisco market will almost certainly fetch a much higher price than one built from the same plans in Ohio.
Several other factors will also play a role in determining a home's value. These include the condition of the property, recent sales of comparable homes, and the quality of the neighborhood.
To muddy the waters even more, buyers and sellers often see several different figures for the value of a home: the market value, appraised value, and assessed value. Each figure can help you determine how much the home might sell for, but it is important to know how they are determined.
MARKET VALUE
In a way, the market value won't be determined until a home is sold. Lisa Kaplan Gordon, writing for the National Association of Realtors, says this value is determined by what a buyer is willing to pay and what a seller is willing to accept.
In this way, buyers can have a strong impact on a home's market value. Trinise L. Castro, writing for SFGate, says the market value will only reflect what a buyer is willing to pay for the property. In a hot market, buyers may compete with each other and drive the price up. In more stagnant markets, sellers may accept offers well below the initial listing price.
A real estate agent will be interested in setting a price at or near the market value when they first put the home on the market. Buyers won't be interested if the home is priced too high for the market, and sellers are unlikely to be happy if the listing price is significantly lower than they think the home is worth.
Gordon says real estate agents will look at many different qualities when determining the market value of a home. These include the size of the home and its lot, the number of bedrooms and bathrooms, recent upgrades such as a new roof, and deficiencies such as an outdated heating system. They'll also look for recent sales of comparable homes in the area to see what buyers were willing to pay for these properties.
The market value is also based on demand in the neighborhood. A limited number of homes for sale, a booming business market, and high quality schools can all boost demand in a local housing market. High crime rates or other detrimental factors can decrease the value of the homes in a neighborhood.
Local conditions can easily change over time. Sarah Smith, writing for Harrison Avenue Realty in Butte, Mont., says anything from the arrival of a large employer to extensive damage caused by a storm can alter the market value. She suggests that this value is best used to determine what a home can reasonably sell for in 30 to 90 days.
APPRAISED VALUE
The appraised value does not come into play until an offer has been made on the home and accepted by the seller. Even then, an appraisal does not need to take place unless the purchase is being financed by a lender.
Buyers who can purchase the home with cash essentially determine how much they're willing to pay for the property. When a buyer uses a mortgage for the purchase, the home serves as collateral against a default on the loan. For this reason, the lender needs to determine if the value of the property is sufficient to cover the balance of the mortgage.
The appraisal method is similar to that used in determining the market value, in that an appraiser will consider factors such as comparable properties and the quality of the home. The key difference