What the industry is not telling you about value!

Ah yes we all remember the fable of the 6 blind men and the elephant. If you forgot it goes a little something like this:

An elephant wanders into the village of blind men. Each one touches a different part and calls out what they think it is. They all realize they are not in agreement and a very vociferous argument ensues.  This continues for quite some time. A wise man happens to be walking though the village and observes the disagreement among the tribe. “Excuse me,” he interrupts. “ I feel that I can solve this squabble for you.”

The villagers stop and ask the wise man how he can solve the dilemma. The wise man begins to speak these words, “this is an elephant and each of you is touching a different part of the animal.” Surprised at this knowledge the villagers end the heated debate as the wise man walks off with a grin on his face.

At this moment you might be wondering what this fable has to do with value. I respond, good question! When the concept of value arises in any real estate discussion; each person has a different view of what the value is. In essence value is what a buyer is willing to pay for something, in this case a home. Determining value depends on many different aspects.

Basically there are four different viewpoints: seller, buyer, agent and bank. We will start with the seller’s perspective.  The reasons for a person deciding to sell are diverse. They can range from a life event or financial needs. These reasons for selling will directly impact what a seller determines their home is worth.

As the agent and home owner are discussing sales price many items are running through their minds. An example is how much money they have spent over the years for upgrades. This is not always in terms of money, but can and usually does include the emotional attachment as well as time spent. Honestly, how can put a “price” on something that you have fond memories of?  Sellers are afraid that they will “give their home away” and will not be able to meet their financial obligations. Sellers are concerned about what they will net from the sale of their home.

On the flip side we have the buyer’s vision of value. Similar to the homeowner deciding to sell, the buyer has had a life event and needs to purchase a new home. The buyer is very price conscious. There is a budget they need to work within. Every item they need to repair or contribute to effects what they can afford. A new buyer is fearful of the new purchase not gaining equity and they are stuck with a home that is worth less than paid.

Then we have the agent. The agent is looking at the big picture and is determining what the current market value is for a home. They are analyzing trends, similar homes sold, determining what challenges may need to overcome, and how to market the home.  

Last but not least we have the driver, the bank. The appraiser is working for the bank; they are hired by the bank to determine market value. Depending on the lending landscape, the appraisal can be very conservative or very flexible. The banks view the home as an investment and what they can recoup if the new homeowner defaults on the loan. In essence they are trying to protect themselves against a potential loss.

So like the blind men in the village each side is calling out a different dollar amount based on their perspective.  Understanding the other persons concerns aids in both parties mutually deciding upon a fair market price.