Indianapolis Appraisal Blog

The short answer to this question is not always. There are two theories of thought about this topic. The first theory is that if home sells for a certain price, then that must be the market value. Seems reasonable, right? Many homeowners and professionals involved in real estate believe this to be true and do not fully understand the meaning of market value. This brings me to the second theory of thought, the appraiser’s view. When an appraisal is completed on a property, the appraiser is most likely appraising its market value. According to the Seventh Addition of the Dictionary of Real Estate Terms, market value is defined as the following:

The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

1. 1. buyer and seller are typically motivated;
2. 2. both parties are well informed or well advised, and acting in what they consider their best interests;
3. 3. a reasonable time is allowed for exposure in the open market;
4. 4. payment is made in terms of cash in United Sates dollars or in terms of financial arrangements comparable thereto; and
5. 5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions by anyone associated with the sale.

I took the liberty of bolding a couple of important words for emphasis. Probable price and prudently and knowledgably are two huge considerations of market value. Anyone involved in real estate knows that buying a home is an emotional decision. Think about it, how many buyers carry around a clip board to each home they look at and make dollar adjustments for the homes’ size, amenities, etc. and actually choose the home that adds up to the best value? Or, how many buyers will bring listing sheets with homes that have recently sold in the area and compare them with the current homes on the market? Not many. If this was the case, there would be fewer situations where the sale price doesn’t equal market value. Most buyers are more concerned about the colors of the walls, size of the bedrooms, how the house smells and so on and so forth. I know this because I am also a real estate broker as well as being an appraiser. So why would buyer pay more than market value for a home? There are too many reasons to count, like I said before, buying a home is an emotional decision and not necessarily a logical one. It may be the buyer is moving in next door to a relative, likes the oversized windows in the home, prefers the layout of the house over another, maybe they like the 100-year-old oak tree in the back yard, maybe the home is close to their children’s school or the buyer simply fell in love with the professional staging job. The reasons can be endless. Appraisers must appraise a home according to its market value (most of the time) and do so without any personal bias. The question appraisers always should ask is: What would most buyers pay for this home? The key word here is most and is not isolated to that one outlier buyer who is willing to pay more for the reasons explained. So should a homeowner worry their paying too much for their dream home every time the go buy a different house? Most likely not. In my experience, most of the time when a home sells on the open market, it usually sells at or very close to its market value because most sellers know they must be competitive to get their home sold, especially in today’s market.

So what options are available to a buyer if the purchase price exceeds its market value?

1. The buyer could ask the lender if another appraisal can be ordered. This is sometimes an option but with lending regulations changing almost daily they may not have the ability to do this.
2. Find another appraiser to review the first appraisal to make sure it looks reasonable. Many times appraisers will charge less for this service.
3. They might try negotiating the purchase price with the seller. Some sellers may not be in the position to come down off the sale price but it never hurts to try.
4. Sellers may find they will have to bring more money to closing to cover the difference. Unfortunately, if a buyer really likes the home, this may be their only option if the above to don’t work.
5. Look for another home. It’s never a bad idea to have a “back up” home in mind incase the first choice doesn’t go through.

So what are options for sellers when the purchase price of their home is greater than its market value? Several of the options above still apply; however, being proactive before listing their home for sale may save them a huge headache later on. Many appraisal companies, including my company Indianapolis Appraisals, can complete a pre-listing appraisal prior to a seller’s home being listed. This has several advantages. First and foremost, the seller will get a certified appraisal from an unbiased appraiser who has absolutely no interest in the property except estimating its market value. Second, the seller will know what the home is estimated to be worth in comparison to other recent sales in the area. In my opinion, one of the best ways to sell a home quickly is to make sure it is priced competitively. Lastly, if the seller is getting a full interior appraisal, the appraiser will measure the home which can later be used by sellers when they list their home. It is always important to make sure a home’s gross living area is accurately marketed to make sure the home is selling it for the right price. Please note that many times the assessor’s records, which is where some Realtors will retrieve a home’s gross living area, is inaccurate and not up to date. I know some appraisal companies in the Indianapolis area, including my own, that offer measuring services for a reduced fee.

So to summarize, sale price does not always equal market value but there are some options if they don’t match. Please visit my site at www.indianapolisappraisals.com to stay current with my blog and learn new useful and timely information about the appraisal industry.