What is the Difference Between Market Value and Appraised Value?
June 28th, 2018 – The differences between market value and appraised are subtle but important, when it comes to real estate. Get this wrong and it could really hurt you, or make your even block your intended purchase of a property, especially in a fast-rising real estate market like Toronto. So, lets take a look at each of these and why they are important.
This is the one we like to think about. It is what the market is willing to pay for a property, or what someone (you?) did just pay to purchase a property. Maybe there was a bidding war and one of the potential buyers stretched a bit more than all the other bidders to come out on top. In so doing, they set the actual market value of the property. Market Value moves up and down with every fluctuation in the market. More homes on the market this week? Fewer bidding wars? It all plays into what someone would actually pay.
The Appraised Value is arrived at by a licensed property appraiser. They are going to use a number of techniques and formulas to compare the characteristics of subject property to a number of other similar properties that have sold in the past number of months. They don’t care about the ebbs and flows of the marketplace. They don’t care about how many participants were in a bidding war for the property. They are trying to do as rational an examination as possible. These appraisals are generally obtained on behalf of a mortgage lender or financial institution, together with the loan to value ratio to ensure there is substance to their loan.
What Does All This Really Mean?
Well, you might have just bought a home for $800,000, but if the bank thinks it is only worth $600,000, you are not going to get as big of a mortgage as you would have liked. So, in this scenario if you were planning on making a 20% down payment of $160,000 you are leaving the bank financing $640,000 on what they appraise at $600,000. If for whatever reason, you were unable to pay your mortgage, the bank would want to sell the property under power of sale and would still be short by $40,000 – in addition to all the fees. Now if you were coming with a much larger down payment of say $400,000 or 50% of the market value, the lender would be much happier to lend you the other $400,000 (assuming you otherwise qualify for the mortgage based on income, credit worthiness and so on).
The key takeaways from this are:
- If you are purchasing with a smaller down payment, you can’t go wild with your offer in a bidding war and pay a market value price that won’t appraise.
- Conversely, being successful in a bidding war with a high offer requires a substantial down payment
- Making your offer conditional on financing approval can be critical, especially when you are less certain of your financial situation or you are reaching above what you think are the reasonable appraised values.