Sometimes it can be difficult to understand the values of houses. If you’re not in the real estate business, things like market values may be a foreign word.
Several terms are thrown around, which can be confusing. You may hear Estimated Value, Estimated Value, and Market Value. All three of these real estate terms have different meanings.
We’ll take a look at all three so you can have a better understanding as they come up. Knowing what they mean is important so you don’t make bad real estate decisions.
Each of them is very different. Let’s have a look.
What is a real estate appraisal?
Estimated Value is an assigned placeholder for what the local government deems an appropriate amount of tax needed to cover the local funds billed to the city or county.
In other words, the estimated value is the value determined by the local government for tax purposes. Market value is what a buyer is willing to pay for the property.
The appraised value of a property rarely corresponds to the market value. See Rated vs. Market Value via Maximum Real Estate Exposure in the reference above for an in-depth analysis of their differences.
Unfortunately, some real estate agents confuse the public by promoting real estate listings. They’ll say things like, “Look at the great value of this house listed under appraised value.”
So what! Many homes are listed below appraisal! Likewise, many are listed and sold above the appraised value. They have little correlation with each other.
When buying or selling a home, you should never take the appraised value of the property as its fair market value. This would be a serious mistake.
What is the market value of real estate?
Fair market value is what a buyer is willing to pay for a property and what a seller is willing to sell.
However, appraised value is the value attributed to a property by the government for tax purposes. The two values are often different as the government may not be aware of recent real estate market trends.
It is important to understand this when selling or buying a property as the market value can be lower or higher than the appraised value.
To determine the fair market value of a property, real estate agents prepare a comparative market analysis or a brokerage price report. The market analysis compares the affected property to similar homes for sale nearby.
Real estate agents will try to use properties with the most similar characteristics, such as square footage, number of bedrooms and bathrooms, location, condition, amenities, and property attractiveness.
You create a report that shows the adjustments between the comparable properties. Once adjustments have been made, a final market valuation can be prepared.
What is a real estate appraisal?
A licensed real estate appraiser determines the appraised value of a home.
The appraised value of a home is determined by a licensed real estate appraiser and is based on many of the same factors that a real estate agent would use, including the property’s size, location, age, condition and amenities.
In theory, the appraised value of a home should match the market value as determined by a real estate agent. Sometimes they are and sometimes they aren’t. Buyers and sellers need to understand that both a valuation and a market analysis are appraisals.
Both appraisers and real estate agents can be wrong here. Sometimes consumers believe that what a reviewer says is the gospel. It is not. Reviewers are human, just like the rest of us. You make mistakes.
When buyers receive a home loan, a property appraisal is required for most transactions. Mortgage lenders will require a valuation unless there is significant equity in the property.
As a rule, lenders only waive an appraisal if their equity is more than twenty percent. Mortgage lenders also require an appraisal when homeowners wish to refinance their existing loan.
Final Thoughts on Types of Real Estate Values
Understanding these three values is especially important when buying or selling a home. You never want to make important decisions based on things you shouldn’t.
The perfect example is trying to relate tax value to home value. Thinking that the appraised value is the same as the market value would be like trusting an online appraisal. The probability that it is not the exact value is high.
When buying or selling, speak to a trusted local real estate agent who understands pricing.
Bill Gasset is a nationally recognized real estate agent who has been helping people buy and sell real estate in MetroWest Massachusetts for 35 years. Bill is the owner and founder of Maximum real estate exposure. For the past ten years he has been one of the top RE/MAX REALTORS® in New England.