Appraised Value 

The real value of a home has almost nothing to do with what they are bought and sold for. Why? Because there are a number of variables that influence the price of a home including, but not limited to, the present economy, what homes in the area (within 1 mile radius) are selling for, the homes amenities or upgrades to name a few.


Market value:

This is the price that a willing and able buyer will pay for your home. If everyone looking at your home bids about the same price, there is very litter the home owner can do. The factors that make up market value are completely out of the seller’s control. For instance, a buyer falls in love with your home because it reminds them of their childhood. Nostalgia can make the home worth thousands more, simply due to emotional attachment. On the other side of the emotional coin, what if the homebuyer says she "gets bad vibes" and believes the home is haunted.  In this case however, no matter what the price, that customers is not going to buy the home.

Appraised value:

The appraised value is basically what the bank thinks your home is worth. This can include everything from what neighborhood you live in, to how many fixtures you have in your kitchen. The appraised value tends to be unbiased, because the bank is not looking to bargain with you. The bank needs an accurate assessment to mitigate risk. It is not likely  that the appraised value of a home is going to be the same as the market value. Why? Because the appraised value of your home is determined in order to justify the amount of the mortgage loan. This price is based on historical data and previous sales comparisons. That means sales of similar homes within the geographical area of the target home in the past six months.

As a home buyer you will encounter problems if there is a large discrepancy between the appraised value of the home and purchase price being offered. According to research done by HUD, the larger the gap the more likely the propensity for loan default.

For instance if a buyer decides to pay full price on a home that they absolutely must have and the appraised value is lower, they might be in for shock when they discover what the down payment is. If the purchase price is much higher, the bank may determine that the appraised value of the home is not enough to cover the requested mortgage, they will often raise the down payment.  Because the homebuyer uses the home as collateral on the mortgage, the bank wants to be assured of its unbiased value.

To avoid the financial shock of a higher down payment, a homebuyer should be aware of what similar appraised values of home in the area are. This is one reason to have an experiences Buyer's Agent represent you during your home purchase.

As was mentioned before the appraised value is based on historical data and comparisons with similar homes that have sold over the past six months. This is not carved in stone. If the market is fluctuating wildly, other factors may enter the picture, so keep aware at all times.

In the past six months, for instance, the average sale price of a home in the United States has gone up a solid $20,000. It is this kind of data that the lender will look at when they are making the appraisal.

Of course if there are multiple bidders this raises flags that for whatever reason the home may be worth more. This is the only instance, in the face of overwhelming interest, where the lender may take into account peoples emotions.

When the appraisal comes in way under the market value the seller has some decisions to make, and the buyer should be aware of what their tactics are. Often they will present a counter-offer that is not based on the appraised value. This will almost automatically eliminate many buyers that cannot afford that initial down payment.

As a buyer this could go either way. It could means that you cannot afford the home, which means you should take it as a lesson and start looking elsewhere. If you can afford it, it means that there will be fewer buyers contributing to an increase in the price of the home. This will not only save you money, but if you can afford the initial down payment it means you will save money over the long term.

Make sure that before, or during the bidding process you have done your own research and you know what home appraisals in the area have gone for in the past.

Lowest common denominator:

Sometimes, the market value of the home will be lower than the appraised value. No matter what the situation the lender will base the mortgage on whichever one is lower. It’s how they cover their bases and make sure the market stays stable. In the case that the appraised value of the home is lower, lets say that it is 5%, the lender will use the difference between the two to calculate the down payment. So make sure you have at least 10% set aside for this contingency. One last thing:

It is important to know the assessed value of your home for a couple other reasons. Let’s say you have gone through the bidding process and you have managed to come up with the necessary down payment. The assessed value of your home will also be crucial when you re sell the home (if you do) there are no guarantees that the appraised value of your home will increase and this could have as much to do with the national economy, your neighbors and a host of other factors. The assessed value of your home will also affect how much you pay annually in taxes. The municipal government uses these value statistics to determine how much tax they collect from you. So if you are astounded that the appraised value of your home was so high, know that over the course of time, the money you saved on a down payment could in fact.

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