In today’s blog, I want to discuss the differences between a property's appraised value and its fair market value and then tell you a little about a property's tax value. Although they are all important pieces of any property, only the appraised and fair market value are generally used in the sale of a piece of property.
The Market Value, or “fair” market value, is the amount for which something can be sold on a given market based on the area, how popular it is and what people are actually paying for properties. A lot of factors can influence this price and they are often driven by low interest rates and people being able to afford more of a home than they could in the past. This will drive more home sales and usually drive the cost of homes up. People that were not considering selling might put their homes on the market at an inflated price, just to see if they can get it. When they do, it gets others noticing and you will sometimes get the “domino effect” in an area.
The Appraisal Value– Is determined by a certified and licensed appraiser, who will look at square footage, number of rooms, age of the roof and appliances, etc., and the comparables (similar properties that have sold recently). The appraised value is a snapshot of a property at a certain point in time and it can vary year over year, based on more recent sales or improvements. In the process of a sale of a property, the appraisal is usually ordered by the buyer’s lender and thus, paid for by the borrower. This usually happens during the loan origination process.
As a matter of note, as a property owner, it is never a bad idea to have an appraisal done on your property, just in case you ever want to consider selling in the future.
If you buy a piece of property in a given market and you pay cash for the transaction, the appraisal value usually doesn’t come into play and may not be required. The appraisal value justifies the amount of the loan for your mortgage company, so if there is no mortgage, the appraisal is more of a guide during negotiations. As we stated earlier, the appraisal values may not reflect the true market value, but they are similar. Like the appraisal, the market value is usually determined by your realtor based on sold comparables or properties newly listed or sold, near the location of the subject property.
Here is an example of how a home’s appraised value and its market value come into play in a property transaction and why it is important to have someone who understands this, working on your behalf.
I recently sold a home in Foley for the listing price of $364,000. It stayed on the market for Two days! Now, I would like to say this is because of my remarkable sales skills. But, in reality, it was more about knowing the market, the property's true value, and listing the property correctly. Or maybe it Was my remarkable sales skills. The world may never know!
We had several showings, really quick and two offers came in on the same day. The neighborhood is a hot market, houses are increasing in value very quickly. Due to the appreciation of the recently sold homes, we felt like the pricing for the home was right on target and we think the quick sale supported that.
Now, here comes the issue. The appraisal value came back below the sales price on our contract. This caused a dilemma because the buyer needed the approval of the mortgage company to buy the property. In this case, the buyer would need to have the seller reduce the price to the appraised value, come up with the difference out of pocket, or they could meet somewhere in the middle.
Our clients had some decisions to make, they could accept the lower price as determined by the appraisal, negotiate a new price, or they could cancel the contract and relist the home. In our case, our client chose option two. We were able to negotiate through the issue and the buyers and sellers are happy. But, you can see how the appraisal value and the market value are tied together in a transaction.
That brings us to the third, lesser used, and lesser understood, value of a property.
The Tax Appraisal Value- The tax appraisal is just that, it justifies the amount of property taxes an owner of a property pays to the tax accessor. This amount is the least accurate determination of a property’s value. A property may go years without an update to the tax appraisal amount that is determined by the tax accessor’s office in a jurisdiction. And, I think every property owner can agree, that they never seem correct.
In the end, the best way to determine the Market value of your property or a property you would like to buy is to contact your realtor, Me – Russ Duggar, so that my knowledge of the areas, comparables, and the market volatility can help guide us to an accurate market value determination.
Call me at (205) 522-8515 and we can start working on a successful transaction for you today!