Appraisal Value vs Market Value

Mortgage Broker

There’s a lot to say about on the topic of appraisals, but here I’ll focus on one particular issue that I see coming up with clients more and more, especially amongst my investor clients and buyers purchasing off-market deals.

Let’s say you agree to buy a property, whether on or off-market, for $500k that you believe is actually worth $550k. Let’s even say it is worth $550k, and the seller knowingly accepted a lower offer because of some other consideration (your offer was firm, had a bigger deposit, a more convenient closing date, or whatever).

Since an appraisal is almost always going to be required on any new purchase these days, what appraised value are we hoping to see in this scenario? As the buyer you’re hoping to see $550k, and rightly so. As your broker and lender, on the other hand, we’re really only hoping to see at least $500k. Why’s that? Mainly, because your mortgage is based on the lower of the purchase price or the appraisal. In other words, even if it came in at $550k, the bank is not going to give you any more money than they would have at $500k.*

Arguably the market value in this case is really only $500k, since the definition of market value is simply the highest price that a willing buyer will pay a willing seller if both the buyer and seller have all the relevant information concerning the purchase and the property has been exposed to the market for a reasonable amount of time.

But you also know that you could turn around and sell the property for $550k, so in effect your left with a situation where your market value is different than the seller’s market value, but for the purpose of completing the transaction from a mortgage perspective our concern is simply that the appraisal value matches the seller’s market value. So the fact the appraisal comes in at only $500k shouldn’t invalidate your belief that you got a great deal, and it really has no bearing on what you might sell the property for!

*Certainly there are private lending scenarios where this may not hold, but that’s a whole other (and very expensive) story.