Can Appraised Value Be Higher Than Market Value?

When Appraisals Exceed Market Price: What It Means for Homeowners

In real estate, you’ll often hear about appraised value and market value. Both are important in understanding a property’s worth, but they’re not always the same. One question that often arises is whether the appraised value can be higher than the market value. Let’s look into this.

Understanding Appraised Value: The Role of the Appraiser

Appraised value is an estimate of a property’s worth at a specific point in time. A professional appraiser, following industry standards, determines this value. The appraiser looks at factors like the property’s features, location, and comparable sales in the area.

The appraised value is often used by lenders to determine how much they’re willing to loan on a property. It’s a safeguard to ensure that the lender doesn’t lend more money than the property is worth.

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Grasping Market Value: The Buyer-Seller Dance

Market value, on the other hand, is the price that a buyer is willing to pay and a seller is willing to accept in an open and competitive market. It’s influenced by supply and demand, the property’s location, and the current real estate market conditions.

Market value can fluctuate based on changes in the economy, interest rates, and local market conditions. It’s the price that a property is likely to sell for if it were listed for sale.

The Possibility of a Higher Value: When and Why

So, can the appraised value be higher than the market value? The answer is yes, it can. This situation might occur if there are few comparable sales in the area, leading the appraiser to base their valuation on properties that aren’t truly comparable.

Another scenario could be a rapidly changing market. If property values are falling, the appraised value might be based on past sales when prices were higher. In this case, the appraised value could end up being higher than the current market value.

The Impact of a Higher Value: Pros and Cons

A higher appraised value can have both positive and negative impacts. On the positive side, a higher appraised value means a homeowner has more equity in their home. This could be beneficial if the homeowner wants to refinance their mortgage or sell their home.

On the negative side, a higher appraised value could make it harder to sell the property. Potential buyers might be reluctant to pay more than the market value. Additionally, if the appraised value is higher, it could potentially lead to higher property taxes.

Navigating a Higher Value: What to Do

If you find yourself with a property that has a higher value, don’t panic. If you’re trying to sell, consider getting a second opinion or challenging the appraisal. If you’re a buyer, use the appraisal as a negotiation tool. Remember, the market value is what a buyer is willing to pay and a seller is willing to accept.

When Market Shifts Lead to Discrepancies

Rapidly shifting market conditions often cause the appraised value to diverge from the actual market value. Appraisers rely on recent comparable sales, typically within the last three to six months. In a quickly cooling market, older comparables might reflect higher prices than what buyers are currently willing to pay. For example, if Toronto’s housing market experiences a sharp downturn, an appraisal based on sales from a few months prior could result in a value exceeding what a buyer would offer today.

This creates a gap where the bank’s assessed value (appraised value) is higher than the price the market will bear (market value). Buyers and sellers must understand this lag, especially during periods of high volatility.

Consequences for Financing and Buyer Confidence

An appraised value significantly higher than the agreed-upon market price can create substantial hurdles for financing. Lenders base their mortgage approval on the lower of the purchase price or the appraised value. If the appraisal comes in higher than the contract price, it typically doesn’t pose an issue.

If the appraisal comes in lower than the contract price, the buyer must cover the difference in cash or renegotiate the sale. When the appraisal is higher than the perceived market value by the buyer, it can erode buyer confidence, making them question if they are overpaying. This might lead to cold feet or an attempt to renegotiate the purchase price downward, even if the appraisal technically supports a higher value.

Conclusion

In conclusion, while the appraised value and market value of a property are often similar, they can differ. It’s possible for the appraised value to be higher than the market value, depending on market conditions and the comparable sales used in the appraisal.

Understanding the difference between appraised value and market value is important for anyone involved in a real estate transaction. Whether you’re a buyer, a seller, or a homeowner, a clear understanding of these values can help you make informed decisions. Remember, knowledge is power in the world of real estate. [ 1 ]