Does Appraised Value Equal Sales Price?
This question came to mind this week when I was speaking with a homeowner at an appraisal appointment. He didn’t ask me this specific question but he did make the following statement: “Just because your home appraises for a certain amount doesn’t mean that you can sell it for that”.
There are several different ways to look at this statement so today we’re going to unpack what homeowners should know about the appraised value of their home. I’ll also give my thoughts on whether it’s realistic to think that you could sell your home for what it appraises for.
Market Value
There are various types of appraisal values, however, for purposes of this discussion, we’re going to be considering market value. I recently wrote a post about Market Value that you can read more in-depth here, however, for convenience sake I will include the definition below. Market value is defined as:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
buyer and seller are typically motivated;
both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest;
a reasonable time is allowed for exposure in the open market;
payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and
the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Whenever you get an appraisal for a refinance, purchase, or pre-listing value you are getting a market value appraisal. The appraiser is providing a value that they believe the home could sell for given the current economic market and current physical condition of the property.
When a bank orders an appraisal for a home they are refinancing or providing financing for someone who is buying a home, they want to know what they could sell it for should the loan go into default. If someone orders a pre-listing appraisal they want to know what their home is worth and what they could sell it for.
The pre-listing appraisal provides a value that reflects what other similar homes are selling for and/or are listed at. This value is also the amount a lender would provide a mortgage on, so a potential buyer would not have to worry about it not appraising for the mortgage.
In these situations, you should be able to sell your home for what it appraises for because the value estimate is based on market data. Because the real estate market is not perfect and humans are involved the actual contract price may vary slightly due to buyer motivations and negotiations, however, it should be very close to the appraised value.
Other Scenarios
With that being said, there are other situations where the appraisal value and the contract price may vary significantly. Some people think that market value is what someone is willing to pay for a home.
While this can be true in some situations it may not always be true. There is always the possibility that you have a super motivated buyer who will pay anything to get into a specific home.
I know there are situations where we have people moving into the Birmingham, AL area from other markets where homes are priced a lot higher. They may be willing to pay well over the asking price because in their mind the home is very affordable compared to where they are moving from.
If they can pay cash then this is no problem, however, if they require a mortgage they may be out of luck. An appraisal will reveal what the majority of buyers in the area have been paying for similar homes.
The person who is willing to pay over market value is considered an outlier. Appraisers do not place as much emphasis on these types of sales as they do the other transactions that are grouped closer together.
If a bank takes a home back in foreclosure they do not want the home to sit on the market for an extended period of time waiting for another “outlier buyer” to purchase it. They want to get the REO property off of their books as quickly as possible so they can move on.
A situation that has become more prevalent recently is the addition of an Appraisal Gap clause in the purchase contract. This clause states that if the appraisal value is lower than the contract price then the buyer will make up the difference, therefore ensuring the sale will occur and giving peace of mind to the seller.
The Appraisal Gap clause takes into consideration the seller’s market we are currently in and realizes that buyers may be making offers that are well over list price due to the limited inventory. The bank will only lend on the appraised value, however, the buyer is able to buy the home because they are paying the difference out of pocket.
A person who does not believe you can sell your home for its appraised value may be thinking about its assessed value, which is different than its market value. The assessed value can vary significantly from its true market value and can be either higher or lower.
Local tax assessors use mass valuation techniques when appraising large numbers of houses. If a home is unique or varies significantly in condition or appeal the assessed value may not be an accurate reflection of its true market value.
Because most county property appraisers do not go into every home they appraise their value could be higher than it should be. In situations like this, an appraisal by an independent appraiser should be done to consider its condition and appeal relative to other homes that have recently sold or are currently for sale.
Conclusion
So, there you have it. In most situations where an appraisal is being used to determine the market value of a home, you should indeed be able to sell it for the appraised value.
As I stated previously it is important to keep in mind that real estate is not a perfect market. Because buyers and sellers have varying degrees of motivation, and due to the ability to negotiate, the final sale price of a house can vary slightly from its appraised value.
Providing a value range would probably be more realistic than a single-point estimate. While this can be done in appraisals done for individuals banks generally do not allow this.
Do you have any additional questions regarding appraisals? If so leave a comment below and I will do my best to answer it. Thanks again for reading.
It’s wild how the term “appraisal gap” has become a household phrase (to a certain extent). I think there is not always an understanding of what market value is in the real estate space. Though to be fair there are some misses from appraisers too.
I agree, Ryan. I think in today’s market with appraisal gap coverage there is less concern for market value. People want to get into a home so badly that they don’t care what they pay. I hope this doesn’t come back to bite them.