House Appraisal vs Market Value: how much is your home worth?

An appraisal from a real estate agent or agency provides an estimate of what a property may sell for, whether by private sale or auction. This appraisal sets a benchmark that can help buyers and sellers manage their expectations. But as we all know, there can be a big difference between what an agent thinks a property may sell for and the final price when the auctioneer’s hammer falls.

A real estate agent may base their appraisal on recent sales of similar properties in the area, considering the property’s age, size, location, and number of bedrooms, bathrooms and car spaces. An agent may also consider lifestyle features and benefits that could make the property more appealing to a first home buyer, owner occupier or property investor, such as proximity to public transport, shops and schools.

Other improvements to a property, such as recent renovations, a landscaped and well-maintained garden, or even just new fixtures and fittings or a fresh coat of paint could all affect an agent’s appraisal of a property’s potential sale price. These little touches could potentially tug the heartstrings of potential buyers, adding to the property’s appeal.

A valuation for a mortgage lender is a formal assessment of a property’s value for the purpose of securing a home loan. Because a property valuation is used as part of a legally binding contract, it’s important that it’s an accurate reflection of the property’s value, rather than a broad estimate of what it could sell for.

Property valuers are more likely to base their assessment on the facts regarding the property, and are less likely to be swayed by emotional considerations. A valuer will look at the age, size and location of a property, along with its number of bedrooms, bathrooms and car spaces. A valuer may also consider whether property values in the local area are rising or falling, and the local area’s zoning.

If enough information is available about the property and the local area, a valuer may be able to make their assessment without ever leaving their desk. Even when conducting a valuation in person, a valuer is less likely to be concerned about the presentation of the property (e.g. painting, fixtures and gardens), though they’ll want to know about the property’s overall condition and if there are any structural issues.

Given that real estate agents and valuers have different goals in mind when conducting property appraisals and valuations, they tend to come up with different results. Valuations are traditionally considered more conservative than appraisals, as banks are chiefly concerned with how the property can serve as security for a mortgage, rather than what a buyer might pay for a home or investment property. It’s why comparing a home appraisal versus its market value may deliver noticeable differences in prices.

Sometimes a buyer who offers to purchase a property at a high price will have their purchase halted if the bank’s valuation comes back much lower than what the buyer has agreed to pay the seller, as this may increase the loan-to-value ratio (LVR) of the buyer’s mortgage. To complete the purchase, the borrower may need to come up with extra money as a deposit, or cover the costs of Lender’s Mortgage Insurance (LMI) to cover their lender’s financial risk in case the borrower defaults on their home loan repayments.

Applying for a free property report before you buy or sell a property could be a sensible way to discover a benchmark for a property’s value, and provide an understanding on property value versus market value. While the estimate may not be exactly the same as the appraisal from an agent or a bank valuation, it can help you set your own expectations when it comes to buying or selling a property, or applying for a mortgage.