Appraised Value vs. Market Value: What’s the Difference?

What Is Market Value?

Also known as fair market value (FMV), market value is how much a property could sell for in the current competitive, open market. You won’t find a formula to define market value; instead, the housing market pushes the home’s value up or down based primarily on supply and demand. 

Because a market value attempts to reflect what a home may sell for right now, it can change with the economy, interest rates, local demand, and other market conditions. Buyers and sellers can use various estimates of a home’s current market value as a reference point when negotiating a deal, although the final sale price may ultimately be higher or lower than the market values you may get from a realtor or find published online.

There isn’t one person who officially determines a home’s market value. Sellers, real estate agents, and online platforms estimate a home’s current market value using comparable home sales and current market conditions, while automated valuation models (AVMs) can provide data-based estimates. Ultimately, buyers and sellers   determine market value through what they’re willing to sell and pay for the property in the current market.

Factors that Impact a Home’s Market Value

Common factors that impact the market value of a home include:

• Buyer versus seller’s market: Supply and demand for homes in specific areas always affects values. For example, you should expect value to go up if there’s a low supply of homes in a high-demand area, while value would ordinarily drop if there’s a big supply with low demand.
• Size and features: A home with more square footage and updated features will likely be valued higher than a smaller home with outdated or missing features in a similar location.
• Location: Specific location features, like school district and proximity to the nearest city, can significantly increase a home’s value, but a less desirable location can lower it.
• Home age: Older homes tend to be less valuable than newer builds. 

How Market Value Is Used in Homebuying

Market value can serve as a reference point for both buyers and sellers throughout the homebuying process. Sellers can use the estimates of current market value to help determine their listing price and how low they’re willing to go during negotiations, while buyers can use it to decide how much they’re willing to offer for a home.

Sellers: When a home is put on the market, real estate agents and sellers often try to price it at or around market value. A seller might price the home higher if they aren’t in a hurry to sell or lower if they want to move on quickly.

Buyers: As an interested buyer, you can make an offer that’s higher or lower than the list price. Since home prices reflect current demand, you might choose to offer above the list price in a competitive market or below the list price in a slow market.

A market value can also provide a starting point for negotiations between buyers and sellers. If an offer differs significantly from the home’s estimated market value, either party may use comparable sales, market conditions, or other information to support a higher or lower price before reaching an agreed-upon sale price.

What Is Appraised Value?

During the lending process, the appraised value of a home is determined by a professional home appraisal. Typically, a lender will request an appraised value of your home when you’re buying or refinancing to confirm they aren’t lending you more than a particular home is worth. It’s also used to calculate the loan-to-value ratio (LTV).

The appraised value may be higher or lower than the market value. For example, if market conditions are hot, the market value might be higher than the appraised value.

Factors that Impact a Home’s Appraisal Value

A state-licensed local professional appraiser will prepare a report that determines the home’s current value for the lender.  In most home purchase transactions, the appraised value will determine how much a lender can loan you for that home.

Some factors that impact a home’s appraised value include:

• Square footage: Homes with a larger footprint typically see higher values.
• The home’s age: Newer homes might receive a higher valuation than older ones.
• Location: Homes in high-demand areas may see higher valuations than those in less in-demand areas.
• Home improvements: Renovations and remodels with recent upgrades could increase the appraised value of the home.

How Appraised Value Impacts Homebuying

When buying a home, your lender uses the appraised value to help determine how much it’s willing to lend. If the home appraises for less than the agreed-upon purchase price, it can create an appraisal gap—the difference between the appraised value and the price you agreed to pay. 

Depending on the situation, a low appraisal could mean that you’ll need to cover some or all of the appraisal gap out of pocket because the lender may not finance the home based on the higher purchase price. Alternatively, you could renegotiate the sale price with the seller or potentially cancel the home sale if your purchase agreement allows it. You may also be able to challenge the appraisal or request a reconsideration of value if you believe important information or comparable properties were overlooked.

Appraisal vs. Market Value for Refinancing

Both market value and appraised value can be useful when refinancing, but they serve different purposes. Before you apply, your home’s estimated market value can help you get a general idea of how much equity you have and whether refinancing may make sense based on current market conditions.

During the refinance process, however, your lender may require a professional appraisal to determine your home’s appraised value. When required, this value—not an informal estimate of market value—is what the lender uses to help calculate your loan-to-value (LTV) ratio and determine how much you may be eligible to borrow.

Appraised vs. Market Value FAQs

Still have questions about the appraised value versus market value? We have answers.

Why Would a Home’s Appraised Value Be Lower Than Its Asking Price?

A mismatch between a home’s appraised value and market value is a relatively common scenario. In a hot housing market with rising prices and stiff competition, a home’s appraised value might be lower than its asking price. Additionally, missing information could impact a home’s appraised value.

How Do Interest Rates Affect Appraised and Market Valuations?

Interest rates typically don’t have a direct impact on home valuations. But when interest rates drop, demand for home purchasing may surge, which might push market valuations higher faster than appraised valuations.

How Do You Know What Your Home Is Worth?

Consider looking at Automated Valuation Models (AVMs) as a starting point. Beyond that, look at real estate comps, which can help you get an idea of what similar homes are selling for in your area. You can also hire a real estate agent to perform a comparative market analysis for a potentially more accurate value.

Which Home Value Is Used to Calculate Property Taxes?

Your home’s assessed value is generally the value used to calculate your property taxes, rather than its market value or mortgage appraisal value. A local tax assessor determines the assessed value according to the rules in your jurisdiction and applies the applicable property tax rate or other local calculation to determine your tax bill.

Your assessed value may be based partly on your home’s market value, but the two values aren’t necessarily the same. Likewise, a mortgage appraisal that determines your home’s appraised value generally doesn’t directly determine your property taxes. But a home sale or changes in property value may trigger a reassessment depending on local laws.

Final Thoughts: Understanding Appraised Value vs. Market Value

When buying, selling, or refinancing a home, understanding the difference between a home’s appraised value and market value can help you make more financially confident decisions. After all, market value estimates what buyers might be willing to pay, whereas an appraised value is a more professional, objective valuation that lenders rely on.

If you’re preparing to buy or refinance, consider getting prequalified for a mortgage today.