Appraisals, Appraised Value, and the Fair Market Value of Your Home

By rerockstar • March 27th, 2010

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How many different ways are there to determine value?

The words appraisal and appraised value are thrown around a lot in real estate. You’ll hear them non-stop when you buy or sell a home. Add in fair market value (sometimes just said as market value and suddenly your faced with a swirling cloud of words that all have different meaning, yet are often mixed together where there meanings start to blur. Knowing the difference is crucial to you in the process of buying or selling a home.

Appraisals

The word appraisal can actually (although wrongly) refer to two different numbers. Having an appraisal of your home, typically refers to the process of having a bank determine the value of your home based on the structure, land, and other factors. This helps the bank determine if they are willing to loan you the amount of money you have offered to pay for the house. Appraisals look at a home from a stand point of “if this house didn’t exist, what would it cost to make an exact replica of it in every way” (even down to the normal wear and tear of the home).

Since the housing crisis, the appraisal has become a lynch pin of the buying and selling process. You can offer $150,000 on a house, but if the appraiser (a licensed professional sent by the bank) determines the home is worth $109,000 – you’re going to find yourself in a precarious situation. Unfortunately, during the run up to the market meltdown, appraisals slipped out of control and banks were taking on high risks by writing loans that exceeded the more rational appraisals. They have attempted to reign in some of these appraisal practices, but as with anything of this nature, the pendulum often swings too far to one side.

Appraised value

This is where things tend to get complicated. When an appraisal of your home is done, there will be a number calculated at the end of the process – the appraised value. However, in San Antonio, the phrase appraised value is often used to mean the assessed value used by Bexar (or other) counties in order to determine the amount you will be charged in property tax. The appraised value (actually the assessed value) is not a implication of real value or worth of your home. Unfortunately, many people still use the numbers from the Bexar County Appraisal District as a point of true value of a home’s worth. This is not a good thing.

I see listings all the time that claim a home is listed “under appraised value” (occasionally they’ll even say “Bexar County appraised value“). While this may be a good sign (we all love to save money), what if the appraised tax value (the assessed value) is too high? Are you really saving money on the home then? Tax values are all over the place. There are plenty of instances where the exact same floor plan on the exact same street with the exact same upgrades in the exact same shape come out as two different appraised tax values (assessed value). Tax valuations can be widely inaccurate at times and knowing this can save you a lot of headaches.

Fair Market Value

Also know as market value, fair market value looks at the local area of the home and takes similar homes and compares them against each other. Looking at sold, pending, and active listings is the basis of how your Realtor® will determine this value. By looking at the local sales data and combining it with local knowledge (potential zoning changes, San Antonio housing market trends, traffic, etc.) and doing a comparative market analysis (CMA for short), your Realtor® will help you determine fair market value of your home.

Determined fair market value is not an exact science either. There are also factors to weigh in, such as how quickly you want to sell and what your bottom line is. The bottom line and fair market value don’t always play nice together. You may want to sell for a certain price to reach your bottom line goal, but you may not be able to in the current market. A Realtor® who allows you to overprice your home in any market is not going to help you, but will hurt you in the long run. When your home has languished on the market for too long, it will often wind up selling for less than fair market value.

The Takeaway

Know the difference between the bank’s appraisal, the local appraisal district’s appraised value (assessed value) (which does not equal the price of the home), and fair market value. Although closely related, they are three truly independent numbers. Do not immediately think you’re getting a deal just because a listing proclaims it is under appraised value (assessed value) (it might be, but if that value is ridiculously high, you’re not saving anything). Work with a Realtor® and get a comparative market analysis (CMA) of your home in order to determine fair market value and do not be swept up in overpricing your home – it will hurt more in the long run.

photo courtesy of kevindooley