When selling a home, you’re likely to hear about fair market value (FMV) and appraised value. Both of these figures refer to the value of your home, but they aren’t necessarily the same. Wondering why they’re different, how they’re calculated and why they’re important? Read on!
What Is Fair Market Value (FMV)?
FMV refers to the estimated price a piece of real estate is likely to be sold for. This value is linked to the health of real estate market, so FMV is affected dramatically by supply and demand.
If a buyer needs a home in a certain area and there aren’t many available, the FMV of a property is likely to be higher simply because of the relative high demand and low supply. On the other hand, if the market is flooded with houses, the FMV of a property is likely to fall.
FMV is different than list price, which is the seller’s advertised price of their home. However, most sellers will consider their home’s FMV as they work to set their home’s list price.
What Is Appraised Value?
An appraised value is the independent valuation of a home as determined by a home inspector known as an appraiser. Homes are appraised for a variety of reasons, but traditionally, lenders hire appraisers to evaluate homes during the underwriting process. Lenders use the appraised value of the home to determine how much money they are willing to loan the buyer. In most cases, the appraised value of the home is just as important as the borrower’s income and credit score in terms of determining the loan.
So how does the bank or lender use an appraisal value to determine how much money they’re willing to loan a buyer? If the appraised value is significantly lower than the market value of the home, the bank may limit the amount of funds they’re willing to offer the buyer applying for a home loan. Conversely, if a bank’s appraiser believes the home is worth more than the asking price, the bank may be more likely to extend the borrower the funds.
How Do FMV and Appraised Value Differ?
While FMV takes market factors, such as supply and demand, into account – appraised value are based on different criteria. More specifically, appraisals consider recent sales of similar homes in an area, the home’s geographic location and the features and condition of the home. Beacause of this – while FMV of a home is more susceptible to the ups and downs of the market and economy, appraised values tend to be more consistent.
Who determines value:
FMV is usually determined by a comparative market analysis (CMA) performed by a real estate agent or broker. A CMA is an informal estimate of market value, based on sales of comparable properties. It can also be performed by a seller, homeowner or anyone else familiar with the market – regardless of licensure. The appraised value, however, must be determined by a licensed appraiser.
Hopefully this overview helped you understand the difference between an appraisal value and fair market value of a property. Please post any questions you have in the comments below!