The “book” definition of market value is readily understood. Market value is, by definition, the highest price a willing buyer would pay and a willing seller will accept, both being fully transparent and fully informed, for a certain piece of real estate. Simply stated, as the price agreed upon by a willing buyer and a willing seller, that price may not be originally listed sales price or even represent the true market value of the subject property. The price that certain real estate is likely to sell on the open market is referred to as fair market value (FMV). Knowing that price is how you price a home for sale, accounting for all the factors and circumstances that are likely to impact on the ultimate sale and disposition of the real estate.
Market value needs to be differentiated from market price which is the price a property can actually be sold in a certain time frame. Market value is a suggested frame of reference. It is the subjective determination that certain real estate property is worth a determined price if offered for sale in the open marketplace, the price a seller may reasonably expect in an open market by fair negotiation, excluding those distressed sales fixed by the necessities and circumstances of a highly motivated and distressed seller. Such market values are normally determined by a realtor, real estate agent, broker, or licensed appraiser, any of whom can make comparisons to similar real estate, property sales in the immediate local area, such comparisons commonly referred to as comparables.
Reliance on professionals that understand the marketplace and comparative market analysis (CMA) is sound. The first order of business is the consideration of comparable sales of similar properties, located close by and sold within the last 30, 60, even 90 days. Comparable sales, also referred to as the market data approach, is simply the most common way to arrive at market value. Adjustments must be made in determining the price for differences in size, location, and the condition of the subject real estate relative to those properties used in the CMA analysis as comparables.
There ought to be a consideration of the localized market trends in that determination of fair market value. If inventory is low and the supply of available and comparable real estate is lower than the demand for same, the classic instance of supply and demand in the marketplace at work here, in a seller’s market, the FMV is higher than what would otherwise be the case. The converse would be true in a buyer’s market. This time, there is a reduction in the FMV due to current market trends.
Unusual circumstances need to be factored in. The condition of the subject real estate is such a circumstance. Another example, among many, might involve an REO, a bank owned real estate property that may be listed at a reduced sales price, substantially less than what would be the FMV of the property under other circumstances, so the property can be quickly moved and they may recoup what they can. Other subjective criteria may come into play. A move in ready home is likely more valuable to a buyer than a property valued higher but requiring much repair and renovation to be occupancy ready.
Keep in mind, market value is an opinion of what a property ought to sell in a localized competitive market predicated upon the features and benefits of the subject property, supply and demand, and how the property stacks up compared to others similarly situated. The major difference between market value and market price is in the eyes of the beholder, the seller or the buyer, and if they come to an accord, they two agree on the true market price. Price may be the preeminent driving factor but it is one factor among several. Unlike market value, an appraised value is not necessarily the price a property will be bought or sold for. Many times, to be sure, a property may be worth more than a given appraised value.
The most common tool applied to determine FMV is comparative market analysis where most realtors, real estate agents, and brokers offer a free evaluation of your property comparing to similar properties recently sold (30, 60, 90 days) before determining a realistic selling price.
A licensed real estate appraiser can be utilized to obtain a more detailed and formalized determination of a property FMV. An appraisal is simply a licensed professional opinion of value. That formalized appraisal covers the legal description of the subject real estate, its size, features, and measurements, the CMA, the property assessed values, repair, and even zoning and environmental considerations as may be applicable. The appraisal report will detail what the property is worth and how the appraiser came to his or her final conclusion. With the goal of the appraiser to estimate the true market value, a particular location may matter more to the appraised analysis and final conclusion than a willing buyer who may not rate the location quite so high to get the house at a particular price.
In conclusion, market value is an opinion of value based upon a detailed analysis of relevant data. It is the agreed upon price negotiated by and between a willing buyer and seller in an open market. That transaction price may or may not represent the property’s true value as other factors or considerations also come into play.as well. In the final analysis, it can be said that the only real measure of market value is what the subject property actually sells for. No more, no less.