You are considering selling your home, and you want to know how much your home is worth?  You decide to call a real estate professional and ask for an appraisal. More than likely, the real estate agent stops you and tells you they cannot give you an appraisal, rather what they can do is give you a Comparative Market Analysis (CMA) to help determine market value.  The next question I get from a potential seller is, "what's the difference?"

In real estate market value and appraisal are not synonyms.  There is an important difference.

Let's briefly look at what the two things are:

Market Value:  Market value is the highest amount that a buyer is willing to pay for a home given the current market conditions.  The market value of a home is ultimately set by buyers, and what they are willing to pay.  A real estate agent will use the value of active, pending*, closed homes to help you determine where your highest market value might be.

Appraisal:  An appraisal value is determined by a person who is state licensed appraiser.  Sometimes this appraiser is also a real estate agent, but not always.  The appraisers are hired by the banks to ensure that the mortgage loan they are giving a buyer, to ensure the bank is not loaning more than the home is worth.  The buyer pays for this appraisal.

The difference between these two things is important, because they are not necessarily the same price.  Typically, an appraisal value is higher than the market value.

However, in the booming sellers' market of the last 12-18 months sometimes buyers are willing to pay more (market value) than a home appraises for (appraisal value) to outbid other buyers.  In some markets just because the appraiser says the home is worth a certain value (appraisal value) does not mean that buyers will be willing to make an offer as high as that (market value).

I have had buyers ask me the question; "Why does the bank care?  If I am willing to pay more than the home is appraised for and have the money to do so isn't that my business?"

Well, the bank is looking to protect itself against loosing money, and it is planning for a rainy-day scenario if the new owner goes into default, or the market falls and the house goes into foreclosure. Therefore, the bank will not give more than the appraisal value.

So, when a real estate agent provides you with a Comparative Market Analysis, they are helping you find the market value of your home.  An appraiser is setting the highest value a bank should provide a loan for to a buyer.

*Pending* A pending home is a home that has an accepted, fully signed contract on the home, and is now in the process of going to closing/settlement.  It is no longer available on the market.