When we embark on the purchase or sale of a property, and when we go to apply for a mortgage, the same question always arises for everyone: Why doesn’t the appraised value match the market value? Understanding the difference between appraised value and market value is complex, but understanding it is also important because it can save you from unpleasant surprises, allow you to negotiate better, and, above all, prevent a deal from falling through at the last minute due to financing issues.
Quick explanation
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- Market value: This is what people are willing to pay today for a similar property in that area.
- Appraisal value: This is a technical valuation performed by an appraiser, used primarily for mortgages.
- Sale price: This is what is ultimately agreed upon between the buyer and seller.
- It’s normal for them not to match; the important thing is to know why and what to do in each case.
What is the market value of a home?
Market value is a realistic estimate of how much a home could be sold for at the present time, taking into account supply and demand. It is usually based on comparisons: similar homes recently sold or currently for sale, location, condition of the property, floor, whether or not it has extras (elevator, garage, terrace, storage room), orientation (interior or exterior), whether it has recent renovations, energy efficiency, etc.
What is the appraised value? What is it used for?
The appraised value is the value determined by an appraiser through a technical report. It is especially useful in transactions involving financing, because banks typically calculate mortgages as a percentage of the lower of these two values: the purchase price or the appraised value.
Appraisals follow specific criteria and methodologies; therefore, although they may resemble the market value, they are not always exactly the same.
Difference between appraised value and market value
Now let’s get to the point, Why is there always a difference between appraised value and market value?
The answer lies in the combination of these factors:
- Different Purpose: The market seeks a probable price, while an appraisal seeks a justifiable value using its methodology and actual property documentation.
- Timeframe: The market reacts quickly, while an appraisal can be somewhat more cautious based on available evidence.
- Actual Condition and Quality: Renovations, installations, Energy efficiency, maintenance, etc.
- Registration and Urban Planning Status: Encumbrances, discrepancies in surface areas, annexes, unpermitted construction…
- Emotional Elements: Views, light, orientation, height, terrace… the market may pay more for these.
What happens if the appraisal is lower than the asking price?
When an appraisal is lower than the asking price, the usual problem isn’t legal, but financial: the buyer may not be able to get the mortgage amount they expected.
This may force the buyer to:
- Renegotiating the price with the seller is a difficult task if there are other interested buyers.
- Consider contributing the additional percentage of the down payment that the bank doesn’t finance in the mortgage.
- Review the appraisal; check for objective errors (square footage, annexes, condition, poorly chosen comparable properties).
- Find another bank that might offer a slightly higher appraisal.
- Explore alternative financing options, such as a loan.
Appraisal below the purchase price
This is the same as the previous scenario (the appraisal is lower than the sale price) but expressed differently. We’re repeating it here for clarity because they seem like different expressions, and sometimes the question we receive is about this other one.
In short, an appraisal below the purchase price means that the report values the property below what was agreed upon.
When is an appraisal necessary and when is a property valuation sufficient?
If you’re going to apply for a mortgage, you’ll usually need an appraisal (because it’s the reference the bank uses to calculate the loan amount). We say usually, if not in almost 100% of cases.
Otherwise, a real estate valuation will always suffice. Whether you’re selling and want to get the price right, have doubts because the area is constantly changing, or need to sell quickly.
Want to know the market value of your property in Valladolid?
At Ker 2000, we prepare a property valuation based on real comparisons and a sales strategy. This way, you’ll avoid inflating the price (and not getting any viewings) or underpricing it (and losing money).
How to find out the cadastral value of my house
You may be wondering about this, or someone may have asked you, and you might not know how to find out. Well, we’ll tell you in the following article. “Cuánto vale mi casa“.
