You may often hear the terms market evaluation, home evaluation, comparative market analysis and appraisal. There are obviously many factors that can affect the value of a property, and different methods of assigning value to a property have some of those factors in common. Here are the two main uses or goals of valuation in real estate and how they differ.
APPRAISAL
An appraisal is most commonly a formally-documented report that provides a value on a property. It is done by an accredited appraiser, and is usually completed at the request of a financial lender or insurer to assist them in making a decision to mortgage or insure a property based on the purchase price in a real estate transaction. Though some comparable properties in the area will likely be reviewed for a general idea of market value, this method of valuation focuses more on basic factors, such as building size, property size, geographic location, age, condition, construction materials and upgraded features. There is typically a fee of at least a few hundred dollars for a residential appraisal paid for by the buyer.
COMPARATIVE MARKET ANALYSIS (CMA)
Also commonly advertised as a home or market evaluation, this is primarily used by real estate agents. It is used to provide an estimate of value for a seller prior to listing a property so that they can set an appropriate asking price. It is also used to provide an estimate of value for a buyer prior to making an offer on a property to determine what they believe the property is worth (and therefore if they feel the property is priced fairly).
The comparison aspect of this analysis comes from other properties in as close a geographic area and as recent a time period as possible. These will include similar properties whether currently listed for sale, sold or expired. The subject property is compared and adjusted for price based on any differences in the comparables. What's different about the value derived for this purpose is that it is more strongly affected by current market trends than an appraisal is. List and sale prices can be driven up or down quickly, sometimes unreasonably, often temporarily, by imbalances in supply and demand, or external circumstances in specific geographic areas for example.
This is usually where the difference between market value and appraised value is most pronounced. An issue arises when a buyer is at risk of losing his/her financing when the appraised value comes in far short of the price they paid for the property. A lender won't mortgage a property at the inflated price knowing that it may not fetch the same price in a year should the buyer default on payments.
A CMA is usually provided free of charge as a complimentary service to potential and current clients. The exception might be an isolated request for a written opinion of value if a property owner needs the document for another reason (ie. mortgage refinancing) where they aren't looking to sell the property. In this case, an agent may charge a fee.
PERCEIVED VALUE
One last important factor that can affect property value pertains more specifically to specific buyers and their individual needs and wants. An agent could come up with a market value for a property and many other agents along with many buyers may agree with it. This could be considered a real, actual or objective value. However, one buyer might see something about that property as being of greater value to him/her. There may be a special or useful aspect that's hard to find in a substitute property and therefore this buyer has a higher perceived or subjective value of the property.
Often the buyer is hesitant to pay more than market value, but in a competitive market (s)he has to weigh the odds of giving up that property only to risk finding out there are no good substitutes. If the property is one-of-a-kind there's nothing wrong with paying a premium to secure that dream home or business.
Sometimes this buyer's higher perception of value is unpredictable and a nice surprise for the seller if the home is seemingly common. This is a bonus for the seller if it occurs without much time and work. Other times it's more obvious to a seller and his/her agent that the property is unique and may be harder to sell. A good agent will set out to market a unique property by targeting those buyers who would be most likely to see value in it.
Have any questions? Interested in learning more about your specific property's value? I am here for advice anytime. ~ Laura
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