Both the appraised value and the fair market value of a property are utilized in real estate transactions. Each value represents a different component of the deal, and there are distinct differences in how they are determined and used.
The fair market value
In the simplest terms the fair market value is the price the property will be sold for. It can be described as an agreed upon price between a buyer and seller, based on the state of the property, its neighborhood, and the real estate market in general. These variables (especially the latter two) are subjective, thus at any given time the fair market value can be influenced by the buyer who may balk at an asking price. The fair market value can be determined by either unlicensed individuals such as the buyer or seller, or a licensed one such as the buyer or seller’s real estate agent.
The appraised value
On the other hand, an appraised value is an educated estimate. It is a figure calculated from the properties measurements, its condition compared to similar properties, and selling activity in the area. The appraiser’s valuation is for the bank and determines, among other things, how much money they can loan you. The appraised value can only be determined by a certified or licensed individual. Appraisers, unlike real estate agents, do not represent the buyer or seller’s interests. The appraisers report must be written in a format everyone can understand.
Differences between the values
The appraised value is important for two reasons: It influences how much the buyer can borrow because banks will only loan up to the appraised value, and it is the basis for negotiations between the buyer and seller toward the fair market value. Because it is based on measurements, the appraised value is an exact number. The market value fluctuates because each buyer/seller negotiation is different. The market value is also influenced by when the negotiations occur. Changes in the neighborhood such as fires, natural disasters, and announcements about development in the area can influence it overnight.