If you’re buying or selling a home, you may have a good idea of how your property is worth. However, official financial decisions, like whether you are approved for a mortgage, are not based on assumptions. They’re based on the appraised value, which is the opinion of a professional appraiser.
Learn more about what an appraised value is and why it’s so important when you’re buying or selling a home, or making decisions about home improvements.
Definition and Example of Appraised Value
The appraised value is a professional opinion of the market value of a property or item. Appraised values are subject to change. For example, the appraised value of a home one year may be different the next year because appraised values are based on the factors that could affect market value at a particular time.
“Appraisals are often completed prior to a lender issuing financing for a property that’s being purchased or refinanced,” Melinda Wilner, chief operating officer at United Wholesale Mortgage in Pontiac, Michigan, told The Balance in an email. “Appraisers are required to provide objective and unbiased opinions about the value of a property and report their findings to the buyer’s mortgage lender.”
Home appraisals are conducted by a licensed appraiser who inspects the property and researches comparable listings and home sales in the area. The appraiser examines current market trends and property features when determining the value of the property.
A home appraiser will also look at such information as floor plans, upgrades and remodels, and even energy-efficient features to help them establish a value.
For example, if you are buying a single-family home, an appraiser might physically inspect the property and then provide you with a value of $350,000. This number will be the appraised value and it’s what a lender will use to ensure that the loan they are making could be covered by the sale of the home, in the event you failed to make mortgage payments.
How an Appraised Value Works
The appraised value is important because the lender uses the appraisal to determine how much money it will lend you as well as the terms of the mortgage, Wilner said.
So, how does that work? Here’s a practical example:
If you’re trying to purchase the home, you’ll need to get the mortgage financed by a lender (unless you’re making a cash offer). “In order for a buyer to secure financing for the total value of the purchase price, the appraisal must be equal to or greater than the value of the purchase price,” Jeremy Kamm, licensed real estate salesperson at Warburg Realty in New York City, told The Balance in an email.
“Should a property not appraise for its purchase price, a buyer may need to leave a greater down payment, or the buyer and seller may need to renegotiate the purchase price … usually depending on the strength of the market at the time of the purchase,” Kamm said.
The appraised value helps protect lenders, but it can also benefit buyers as well. That’s because an official estimate of the home value can protect buyers from overpaying on a property by providing a fair market price.
An appraisal can also be important when considering home renovation projects if you’re getting a loan for your renovation project. You may need an appraisal that takes into account the future market value of your home after your renovation. Knowing how much a renovation may add to the current market value of your home can help you choose projects and features that will boost your home value the most.
Finally, having an appraised value of your home can help you with family estate planning.
Appraised Value Vs. Market Value
An appraised value is an estimate of the market value, whereas the market value is the ultimate selling price, determined by buyers and sellers. Here’s more on how they compare:
|Appraised Value||Market Value|
|Determined by licensed appraiser||Determined by consumers (buyers/sellers)|
|Important factor to lenders||Not important to lenders|
|Analytical and objective value||May be a subjective and emotional value|
|Could be outdated in time||Reflects real-time fluctuations|
While the appraised value and the market value are similar, there are differences between the two. For one, appraisers tend to use closed sales in comps when they’re determining the value of the home. But, this can sometimes be inaccurate because of fluctuations in the marketplace, Kamm said.
On the other hand, market value is more subjective than an appraised value because it is driven by consumers, Wilner said. “Consumers may be willing to pay more for a house than what the rest of the market supports, and sellers may be willing to sell their house for less than what the market supports.”
Is Getting an Appraised Value Worth It?
Getting an appraised value is certainly worth it if your lender requires it, but it may also be worth it even if it’s not required.
The appraised value can affect the home’s ultimate selling price. If you’re the buyer and the house has a lower appraisal than the contract price, having an appraised value can work to your advantage. You may not be willing to pay the seller’s original asking price in that case.
”If there is a financing contingency and the property doesn't appraise for the contract price, a buyer could negotiate the price down or cancel the contract,” attorney Michael J. Franco, licensed associate real estate broker at Compass Realty in New York City, told The Balance in an email.
But if the seller doesn’t want to negotiate, and the buyer doesn’t want to cancel the contract, there’s only one option left: The borrower will need to pay the difference.
Can You Increase Appraised Value?
Increasing the appraised value can be tricky. Your two options are to challenge the appraisal or to physically change the property.
You might be able to provide comps that could justify an adjustment, but appraisers are rarely willing to adjust their findings and appraisal value, both Kamm and Franco said.
The other option is to increase the property’s appraised value through a home renovation project. You can add rooms or increase the size of a pre-existing space, which could help raise the appraised value.
However, increases in the appraised value don’t often result in a dollar-per-dollar comparison, Wilner warns. “For example, if you add an extra bathroom with a cost of $20,000, it may not mean that the house will appraise, or sell, for $20,000 more.
- Appraised value is used by your mortgage company.
- Appraised value is different from market value.
- Appraised value is objective, rather than subjective.
- Appraised value can be increased,