Why Contract Price Isn’t Market Value: Debunking the Myth for Realtors and Homebuyers

As a real estate appraiser, I often hear people say that if someone is willing to pay a certain price for a property, that’s its market value. However, this is not necessarily true. Market value is the most probable price that a property should sell for in a competitive market, with both buyers and sellers acting prudently and knowledgeably, and no undue influence on the price.

When someone buys a property with a mortgage, the lender will require an appraisal to determine the market value of the property. This is to make sure that the property is worth the amount of the loan. If the appraised value is lower than the contract price, the buyer may need to come up with additional cash.

It’s important to understand that an appraisal is an independent and unbiased opinion of the market value of a property. The appraiser considers many factors, such as recent sales of comparable properties, the condition and features of the property, and any market trends or conditions that may affect value. While the contract price may be one factor, it’s not the only thing appraisers consider.

For example, let’s say a house is listed for $500,000, and a buyer agrees to pay the full asking price. However, the appraiser determines that the market value of the property is only $450,000. In this case, the lender may only be willing to provide a mortgage for $450,000, and the buyer would need to come up with the additional $50,000 in cash.

In another example, a buyer agrees to purchase a property for $400,000, but the appraiser determines that the market value is actually $425,000. In this case, the lender would be willing to provide a mortgage for the full amount of the purchase price, but the buyer may be overpaying for the property.

In conclusion, the contract price of a property is not the same thing as its market value. Appraisers provide an objective opinion of market value based on many factors, not just the contract price. It’s important to understand this distinction when buying or selling real estate.

If you’re a realtor or homebuyer, it’s important to work with an experienced appraiser who can provide an accurate assessment of the market value of a property. For more information on real estate appraisals and market value, check out the Appraisal Institute or the National Association of Realtors.