What Is Appraised Value in Real Estate? Definitions, Purpose & More
Whether you’re a real estate market newcomer or a seasoned pro, this article will help you answer the question: What is appraised value in real estate? Explaining its definition, the purpose behind it, and its critical importance in determining how much a property is worth in the eyes of lenders, buyers, and sellers. So without further ado, let’s dive in!
What Is Appraised Value in Real Estate?
The appraised value is the estimated market value of a property as determined by a professional appraiser through a detailed appraisal process. A key phrase in market value is considering “the most probable price a property should bring.”
This figure is carefully calculated based on a variety of factors, including the property's condition, location, and comparison with similar properties that have recently sold in the area.
The appraisal value is a crucial part of real estate transactions, holding significant sway in the buying, selling, and refinancing of properties.
Purpose of Appraised Value
Now that we’ve answered the question “What is appraised value in real estate?”, let’s see what it’s used for.
For buyers, it's a safeguard against overpaying, ensuring the price paid reflects the true market value. Sellers, on the other hand, rely on it to set a realistic sale price that attracts potential buyers while maximizing their return on investment.
Lenders use the appraised value to secure their investments. It dictates the amount they are willing to loan, based on the property's worth, thereby minimizing their risk in mortgage lending. Should a loan default occur, the lender needs assurance that the property can be sold for an amount at least equal to the money lent.
Investors turn to appraised values for a clear picture of a property's potential return. This valuation is crucial in investment analysis, helping investors to identify profitable opportunities and forecast future income.
The appraised value may also play a critical role in property taxes. Local governments do not use residential appraisers, but employ their own guidelines for establishing property taxes. However, a homeowner may hire an appraiser to determine an accurate valuation for contesting property taxes.
How The Appraised Value Is Determined
Determining the appraised value of a property is a detailed process that combines on-site home observation with a thorough analysis of several critical factors.
This comprehensive approach ensures that the appraised value reflects not just the physical state of the property but also its standing in the broader real estate market.
To learn more about the appraisal process, check out the blog posts below:
How Do Appraisers Determine Home Value? Find Out Now!
Behind-The-Scenes: How Long Does a Real Estate Appraisal Take?
What Is a Real Estate Appraisal Report? | An Easy Guide
Differences Between Appraised Value, Market Value, and Assessed Value
Understanding the differences between appraised value, market value, and assessed value is crucial for anyone navigating property transactions or managing property taxes. Here's a breakdown of each:
Appraised Value
This is the value as determined by a professional appraiser, based on a comprehensive analysis of the property, its location, improvements, current market trends, and comparable sales.
The appraised value is used by lenders to determine mortgage amounts, by buyers and sellers to negotiate sale prices, and often in legal settings such as divorce settlements or estate disputes.
Market Value
Market value may often be seen as the most dynamic form of value. Market value is what a willing buyer would pay a willing seller for a property, under normal conditions and without undue pressure. It's influenced by factors like supply and demand, buyer preferences, and economic conditions. The key phrase in market value is “the most probable price a property should bring.” Differentiating market value from appraised value can be misleading, because appraisers are most often determining market value as the appraisal assignment. In other words, the appraised value is most often the appraiser's opinion of the current market value. These values (Appraised Value and Market Value) may be synonymous.
Assessed Value
This value is determined by local government assessors and is used primarily for calculating property taxes. The assessed value may be a percentage of the market value, which varies by jurisdiction.
It's important for property owners to understand these differences since it directly impacts the amount of property tax owed. Unlike appraised value or market values, assessed value is specifically tied to tax rates and public budgeting processes, not directly to property sales or financing.
Factors Influencing Appraised Value
Determining a property's appraised value is influenced by multiple factors, ranging from the broad strokes of the economy to the fine details of the subject property. Here's a closer look:
External Factors:
Market Conditions: The real estate market is perpetually in flux, influenced by supply and demand dynamics. A high demand for properties in a low-supply market can drive up appraised values, while the opposite scenario can lead to lower appraisals.
Economic Trends: Broad economic indicators like employment rates, inflation, and consumer confidence can significantly impact real estate values. A robust economy often correlates with higher property values, whereas economic downturns can depress them.
Interest Rates: The cost of borrowing money to buy property affects real estate demand. Lower interest rates can increase demand and, subsequently, property values, while higher rates might cool the market and decrease values.
Property-Specific Factors:
Home Improvements: Upgrades and renovations can positively influence a property's appraised value. However, the value added might not always match the cost of the improvements.
Location Features: A property's location within a community can significantly affect its value. Proximity to amenities, schools, shopping, employment and public transportation can impact market reaction and therefore impact the appraised value.
Condition and Age: The overall condition of the property plays a crucial role. New homes, well-maintained homes or renovated homes may command higher prices compared to older, dated homes with deferred maintenance.
Unique Features: Special attributes of a property, such as waterfront views or custom architecture, can also affect its appraised value. These features can add considerable value in some markets, though their appeal might be more limited in others.
Challenges and Disputes
Navigating the home appraisal process can sometimes have various challenges that can affect the accuracy of the appraised value.
Common Challenges:
Unique Properties: Homes that break the mold, whether through custom designs, historical significance, or unusual features, can present a significant challenge. Without comparable properties to reference, determining their value requires a deeper dive and a bit of creativity.
Rapidly Changing Markets: In a market that's heating up or cooling down quickly, past sales data may not accurately reflect current values, making it tough to pin down the right number. This can lead to appraisals that are out of step with the market's reality.
Navigating Disputes:
When the appraised value doesn't align with expectations, it can throw a wrench into the home buying process. Whether the appraisal comes in lower or higher than expected, there are steps you can take:
Review the Appraisal Report: Start by carefully reviewing the appraisal report for any errors or oversights. Misunderstandings or missing information about the property can lead to inaccurate valuations.
Challenge the Appraisal: If you find discrepancies or believe the appraiser has overlooked key aspects of the property or market, don't hesitate to challenge the appraisal. This involves presenting evidence, such as missed comparables or unaccounted improvements, to support your case. If the appraisal is for purposes of obtaining a loan, the appraisal challenge must be presented to the lender, not the appraiser.
Request a Second Opinion: Sometimes, a fresh set of eyes can make all the difference. If disputing the initial appraisal doesn't lead to a satisfactory resolution, consider requesting a second appraisal. Choose an appraiser with specific expertise in your property type or market area for the best results.
Whether you're contemplating selling, pondering a purchase, or considering refinancing, the insights provided by a professional appraisal are invaluable. Don't leave your real estate transactions to guesswork. Consult with our licensed appraisers today and take the first step towards navigating your real estate journey with confidence.
