Property valuation is a big deal in the world of commercial lending. Whether you’re a lender, investor, or borrower, nailing down an accurate valuation can make or break a deal. But when you’re comparing Estimated Market Value (EMV) to Real Market Value (RMV), there’s often a gap between the two. So, how spot-on are these valuations, and why do they sometimes differ?
What’s the Difference Between EMV and RMV?
Before getting into the nitty-gritty of why EMV and RMV don’t always match up, it’s good to understand what each one means:
- Estimated Market Value (EMV) is essentially a ballpark figure of what a property’s worth. It takes into account things like location, size, comparable sales, and what’s going on in the market at the time. It’s the sort of figure you’ll come across during pre-approval or in a property appraisal.
- Real Market Value (RMV), on the other hand, is the price a property would actually fetch if it was up for sale right now. It’s what someone’s willing to pay when the rubber hits the road. Things like buyer demand and a property’s appeal all come into play here.
Why Do EMV and RMV Differ?
Even though EMV and RMV are meant to give you a sense of a property’s worth, they often don’t match up. Here’s why:
1. Market Ups and Downs
- The property market can change at the drop of a hat, and sometimes the EMV can’t quite keep up. When property prices surge or drop—whether it’s because of interest rate changes or economic shifts—the EMV might not reflect that as quickly. That’s especially true if it’s been a while since the data was updated.
- For example, in a hot market, RMV might be higher than EMV because buyers are more willing to pay a premium.
2. Data Quality and Freshness
- EMV calculations rely heavily on data. Automated Valuation Models (AVMs) use things like past sales and overall market trends to spit out a value.
- But if the data is a bit stale or doesn’t consider recent local quirks, the EMV might not be spot on. That can lead to a mismatch between EMV and RMV.
3. Property Perks and Quirks
- An EMV can miss some of the unique features that make a property stand out. A model might not fully capture the extra value of a recent reno, a killer view, or those solar panels you just installed.
- On the flip side, EMV might not take into account those unglamorous bits—like the need for a new roof or a tricky zoning issue—which means it might end up higher than what the RMV would be.
4. Different Ways of Valuing
- EMV and RMV use different approaches. EMV might come from AVMs or desktop appraisals, while RMV comes from recent sales, property inspections, and what’s happening on the ground.
- This can lead to bigger differences when valuing properties that don’t fit the standard mould, like mixed-use sites or a warehouse-turned-office space.
How to Bring EMV and RMV Closer Together
While you can’t always make EMV and RMV line up perfectly, there are a few things you can do to get a more accurate picture:
- Get a Pro Involved: Having a qualified valuer do a full inspection can give you a clearer RMV, making sure you don’t under- or overestimate the property’s worth based on EMV alone.
- Keep the Data Current: If you’re using AVMs, make sure the data is up to date and reflects what’s going on in the local market. The more recent, the better.
- Blend Data with Local Know-How: Mixing data-driven EMV estimates with local knowledge can give you a better understanding of why values might differ. It’s that balance between numbers and what’s actually happening on the ground.
Final Thoughts
EMV and RMV both have their place in property valuations, but knowing why they can be out of sync helps you make better decisions. EMV gives a quick, data-based estimate, but it’s RMV that tells you what the property could genuinely sell for. For commercial lenders, getting a handle on these differences helps manage risk and deliver a better experience for clients.
At the end of the day, understanding valuations can mean the difference between a deal that’s right on the money and one that leaves you second-guessing. So, take the time to dig a little deeper into those numbers, and you’ll be on the right track in today’s ever-changing property market.