Market Value? What the Heck Does That Mean, Exactly?

Market Value?  What the Heck Does That Mean, Exactly?

Fannie Mae defines Market Value as “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. “  It goes on to say “Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:  (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

THAT'S NOT REALLY HELPFUL, IS IT?

In layman’s terms, Market Value is is what a Buyer is willing to pay and what a Seller is willing to accept in today’s market, assuming both parties are well informed about comparable sales in the area and that there aren’t any financing perks thrown into the deal, like a property trade.  (  ie:  I’ll buy your 3 bedroom colonial and I’ll give you $50,000 cash, my pontoon boat, and my time share in Florida.  That might be a great transaction for both parties, but it’s not useful in determining market value.)

Determining Market Value is a lot of science and a little art, and you really do need someone who knows what they are doing to help you.  

THERE ARE NUMEROUS FACTORS THAT IMPACT MARKET VALUE

Location.  We’ve all heard “location, location, location.”  It does matter.  Different neighborhoods within the same city can have completely different market values for similar size/style homes just because of the location.  Is there a factory going in across the street?  A golf course next door? How about a neighborhood park?  Or a major highway directly behind the house?  These things matter when comparing homes.

Age of home.  A home built in 1890 is just not a good comparable for a home built in 2010…just think about the changes in electrical code in that period of time!

Square footage of home and size of lot.  Frequently, larger homes and lot sizes have higher market values, however the law of diminishing returns does eventually step in.  Bigger is not dollar for dollar forever.  For example, just because a 2 acre lot in Monmouth, ME sold for $30,000 does not mean that a 40 acre lot in this same town should sell for $600,000 (using $15,000/acre as an example).  A 2,000 sq. ft. ranch is not the same home as a 1,000 sq. ft. ranch, even if they are in the same neighborhood.

Layout/Style.  Ranch homes are not good comparables for 2 story colonials.  A two bedroom home is absolutely not in the same class as a 4 bedroom home. In areas where one particular layout is preferred (sells quickly) that layout probably has a higher market value…all other factors taken into consideration.  (Like location, for example.)

Condition.  THIS FACTOR IS COMPLETELY WITHIN A SELLER’S CONTROL.  A home is good condition is going to have a higher market value over a comparable home in fair or poor condition.

Sale prices of recently sold properties.  Not what they LISTED for.  What they SOLD for.  And it has to be recent sales – it’s about the market TODAY, not two years ago.  The look back period is generally the preceding 6 months, however sometimes the preceding 12 months must be used if there haven't been many sales in the area.

Current competing properties.  How many comparable properties are on the market?  If there is a large inventory of properties for sale, like the recent real estate market, market values will be lower.  Remember Economics and Supply and Demand?

AND THEN THERE IS THE STUFF THAT JUST DOESN'T MATTER

The price you originally paid for the property.  Doesn’t matter.  What you paid 8 years ago has absolutely no influence on what a buyer TODAY is willing to pay.  The market today will be completely different from the market 5 years from now.  The only thing that matters is what is happening TODAY.

How much money you WANT to walk away from the sale with.  Sorry, this doesn’t matter either if the current real estate market does not justify the higher price.

How much money you NEED to walk away from the sale with.  Nope.  Not a factor.  Buyers  care about how much the property is worth based on the current market.  That’s why we are seeing so many Short Sales in the current real estate market.  These properties are selling for less than the owners owe (need.)

How much it would cost to rebuild today.  Frequently, this subject comes up in conjunction with insurance. (“My homeowner’s policy says my house is worth $500,000!  How can you tell me that it has a market value of $350,000?”)  Insurance policies are about risk.  What materials are used in the property’s construction and how fast do they burn?  Are there any potentially injurious items on the property?  (ie:  trampolines) Do you live in a high crime area?  What is your credit score? 

Personal opinions of family, friends, neighbors.  Your neighbor, who used to be a real estate agent but is now selling cars, says it’s worth X. Your wife’s uncle’s best friend says the house the next street over sold for X so your home should be worth Y because it’s in WAAAAY better condition.  Local neighborhood gossip says that Fred and Ginger down the road got Z for their house!  It’s great that there are so many people in your life ready to help you, but their opinions JUST DON'T MATTER.