Fair Market Value and how it impacts Buyers and Sellers

I have been reminded over the past few weeks that buyers and sellers need to understand fair market value and how it impacts a succesfull sale  or purchase of their home.

Fair Market Value is the price agreed upon and in which the money and property exchange hands between a home buyer and home seller. Fair Market Value is a price in which the general buying public would be willing to pay. Both buyer and seller must be willing and informed to buy/sell the piece of real estate in a arms length transaction. A transaction where neither party is desperate to sell or buy and where the property is given reasonable exposure to the open market.

In a nutshell, the value in which you will most likely obtain a sale.

How do you determine fair market value?  The two most common ways of determining fair market value is by an independent real estate appraisal or a broker price opinion.  The fair market value should not differ much more than 5% or so from one appraiser/broker to another.  Determining fair market value is a little bit more of an art than a science and as a home buyer or seller you should look at the data to see if it makes sense.

How fair market value of a property effect a home buyer?  Many times buyers want to go in blindly and offer x% below the asking price( that's what their dad told them).  It is more important to know the fair market value of the property first.  Then based on how much you like the home  and how willing you are to lose the home over negotiations will help you determine a negotiating strategy. 

Home buyers must remember that anyone can list a home for any price they want, sometimes higher, lower or right at fair market value. The list price does not necessarily have anything to do with value. (hopefully the price is in the ball park).  Even in this slower market, I see buyers lose homes by underbidding on homes that are priced right at fair market value or slightly below, as they are trumped by stronger offers.  When a home hits fair market value in the marketplace, either coming on at the right price or through a price reduction, it receives a lot of activity and will sell quickly.  Offering an extremely low price and crossing your fingers for a desirable home will often lead to dissappointment  rather than a new home.  I see way to many homebuyers be dissapointed because they lost a home in the negotiating process while a more educated buyer comes in and takes the house from right under their nose.

As a quick story,  I had a buyer who looked at a foreclosure that was only a year old.  He liked the house and wanted to put in an offer.  He asked me what I thoughthe should offer.  I showed hom the comparables and suggested he start his bidding over asking price.  He said, no way am I offering asking price or above.  That day the property received 5 offers and sold for 10% above asking.  Why? becuase it was undervalued to begin with.

How fair market value of a property effect a home seller?  A home pricing strategy based on fair market value rather than what your neighbor Bob said, makes for a quicker sale, with less hassles and for top dollar.  Invariably sellers want to leave room to negotiate and then a little just to see.....  What happens when you overprice?  When you overprice you are marketing your home to the wrong buyers. Home buyers in this marketplace are very educated about the pricing of homes due to the internet.  The marketing period drags out and the home stagnates on the market.  You then must drop the price of the home below fair market value to regain interest in your home.  Leave the emotions in the closet and look at the sale statistics. When you are priced in the range of fair market value it is much easier to throw comparables at potential buyers to support the asking price of your home.  A savvy buyer's agent will ask the listing agent if he can help them out with the comparable used to price the home.  It's hard to support your position when you don't have any.

I can't tell you how many homeowners in the past couple years have rejected good offers only to go on to sell for much less than their first offer. 

So.... Understanding fair market value is the key to successful home purchase and home sales.  As a buyer don't focus on list price but fair market value for successful negotiating.  Sellers, pricing at or close to fair market value akes for a much easier sale.

And..... for both buyer and seller it is much easier to negotiate from a position of strength when you know the fair market value of a home that you are buying or selling.