What Makes up the Value of Your New Home?

Home values are not usually based on something as vague as the seller's wishes. Two types of values are in play when it comes to home values. Understanding these two types of values is important for buyers when it comes to several different aspects of home-buying. Your offer price, your financing, the cost of homeowners' insurance, property taxes, and more are all affected by value.

To learn more about appraised value and market value, read on.

The Professional Appraiser's Opinion on a Home's Value

In most cases, a professional appraisal is a requirement. Appraisals don't totally ignore what's happening in the real estate market, but they focus on the nuts and bolts of the home. The appraiser reviews the facts about the home's size, number of rooms, lot size or acreage, and its special features. Most appraisers work independently of lenders now. In the not-too-distant past, lenders were sometimes in a conspiracy to inflate the value of a home, which drove up the purchase price and benefited the lender.

When the value of a home you are interested in buying appraises at more than the agreed-upon purchase price, things are rosy. This means you are getting a bargain, and both you and your lender are likely pleased with the numbers. On the other hand, when the appraisal comes in unexpectedly low, the lender won't be able to lend you enough to cover the purchase cost.

There are a few ways to deal with a low appraisal:

  1. The seller lowers the selling price to the appraisal price.
  2. The buyer uses cash to lower the mortgage cost.
  3. The deal falls through and the buyer gets a refund on their earnest money deposit.

The Professional Real Estate Agent's Opinion on a Home's Value

Most sellers rely on their real estate agents when setting the price of the home. Market value and the appraised value, when accurate, are often very close to each other. Market value is based on the selling prices of homes that are very similar, that are in the same geographical area, and that are fairly recent sales. Market value and the home's selling price are often different because sellers need room to negotiate down. The research to determine the market value of the home, performed by the real estate agent, involves something known as "comps". Comps compare similar homes that have sold in the neighborhood.

Working with these two home values can be confusing. Speak to a company like RE/MAX Alliance to find out more.