After you apply for a mortgage to finance a home, your bank will appraise the property to establish the market value, right? Wrong!
It’s true that when applying for a loan, your bank will appraise the value of the home you’d like to purchase, but the number they come up with doesn’t exactly provide an entirely accurate portrayal of the home’s value. In real estate, a meeting of the minds is necessary between the buyer, seller and lender in order for the sale to carry through and close. For this reason, the bank value and market value – though different – should ideally be as close as possible.
So what exactly is the difference between bank value and market value of a property?
The bank or lender needs to make sure that the amount of the mortgage loan doesn’t exceed the property value. It’s the bank value of the property that will help the lender determine whether or not to proceed with a mortgage loan for the buyer, as well as help the bank to figure out how much it would get if the property were sold. Factors such as the size of the home, neighbourhood, and value of surrounding properties will help determine the bank value of the property.
The market value, on the other hand, represents how much the seller could get for the property from potential buyers. How much buyers are willing to pay for a property will establish it’s market value, which can differ greatly from one person to the next. An important factor to consider is that market value is determined by what buyers are willing to pay for a property, not the asking price of the seller.
If, for example, the seller lists a property for $400,000, but buyers are only willing to offer $350,000, then the market value would be $350,000. On the other hand, if a number of buyers are interested in the property and are willing to offer the full asking price, the market value of the property can meet or even exceed the seller’s asking price.
The closer the bank and market value are to each other, the more likely a sale will successfully close, and the lender will grant a loan for the property.