When it comes to real estate, there must be a meeting of the minds for a property sale to take place. The value a buyer applies to a property can vastly differ from the value a seller or lender places upon it. The seller, the buyer and the lender must find an agreeable value to attach to a property so the sale can proceed. This can be accomplished only when the market value and the appraised value are as close to each other as possible.
The market value is the amount potential buyers are willing to pay for property. A seller can set an asking price, but that amount may not necessarily be in agreement with what buyers are willing to pay. The difference between an asking price and the market value is largely out of the seller’s control. For example, one person can view a property, determine it is exactly what they are looking for and well-worth the asking price, whereas another person could look at the same property and feel the asking price is too high.
When a potential buyer goes to a lender to get a mortgage for property, the lender will take several factors into consideration when determining the property’s value. The property’s neighborhood, the value of properties of similar size and construction, even such things as the type of fixtures on the premises and layout of the parking lot are considered when determining the appraised value of a property. This is the value on which a lender will determine whether to proceed with evaluating overall creditworthiness of the potential buyer.
Differences in Determination
The market value of a property is the amount a buyer is willing to pay, not the value placed on the property by the seller. For example, a seller might list a property for $250,000, but if buyers are only willing to pay $200,000, then the market value is $200,000. Conversely, if property listed at $250,000 has several buyers interested, the market value can meet or exceed the listed price. Appraised value is the value the interested buyer’s bank or mortgage company places on the property.
A large gap between the appraised value and the asking price can be a problem for the buyer. If the lender thinks the appraised value of the property is not enough to cover the requested mortgage, the lender could require a larger down payment, which can be problematic for a buyer because it could require additional funds of several thousand dollars.
When setting a sale price, make sure you are not over-pricing the property for the neighborhood. A common mistake many property owners make is over-improving a property. If the property’s value is well over the average market value of the other properties around it, getting a sale price that will not result in a loss could be difficult. It can also have an adverse affect for the appraisal value. If the property appraises for more than others in the neighborhood, a lender might be less willing grant a loan for the property because it does not fall within the historical trend of the neighborhood.