Monday, July 2, 2012

First Person: Taking the Mystery Out of Market Value

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."

Even as a professional real estate agent Fannie Mae's description reads more to me like Greek stereo instructions than it does a real explanation. And I suppose it doesn't make a lick of sense to you either. The scary thing is, market value is one of the most important, most widely used, but also most widely misunderstood term in real estate today. Allow me to break it down for you in manageable chunks.

What is market value?
Simply put, market value is what a buyer is willing to pay for a property and what a seller will accept, sans any funny business -- like offering someone $4,000 under the table to pay above market value for your house.

How is market value determined?
Determining market value is done using a lot of complicated math and a little bit of art. The truth is, market value can truly only be determined by a real estate expert (usually an appraiser). However, in order to understand market value, and how that value is determined, you have to take into account 6 factors.

Location. Different neighborhoods typically have entirely different market values for similar sizes or styles of homes based on location alone. Is there a park nearby? That's a plus. Does the property back up to a strip mall or busy street? That's a minus.

Age of home. A home built in 1990 is not a legitimate comparable in contrast to a home built in 2012. Building codes change, building materials are upgraded and the only constant in real estate is change. Trying to compare a new home to a 10-year-old home is like trying to compare apples to oranges. Your market value is determined based on the closest comparable value of homes similar in size and style.

Square footage. Larger homes on larger lots have higher market values than smaller homes on smaller lots. Simple enough, right?

Layout/Style. A ranch house will not have the same value as a 2-story colonial. A two bedroom home is not an equivalent to a four bedroom home. When there is an area where a certain style of home is in demand by buyers in that area, the market value of that style of home goes up. And trust me, that adds a lot of variables into the market value mix.

Condition. A home in good to excellent condition has a higher market value than a comparable home in fair or poor condition.

Sale prices of (nearby) recently sold properties. This is where many of my sellers would get confused. This is not the price a house was listed for, but rather what the house sold for, including concessions. Additionally, the value your neighbor sold his or her house for two years ago means nothing. Sale prices are only valid in an appraisal for 6 to 12 months, but the most recent 3 months' worth of sales holds the most weight.

Currently listed properties. How many properties like yours are on the market right now? If there is a surplus, your market value drops. It's the law of supply and demand.

Bottom Line
What you paid for the property doesn't matter. How much money you want to walk away with holds no bearing. How much money you need is meaningless to the market. The personal opinions of friends, family members or armchair real estate experts hold positively no water. When it comes to market value, the only thing that matters is the expert assessment of an appraiser. And, most times, my clients didn't like it, but the market is what the market is, and there is extremely little you can do to change that.

Get an estimate of your market value before you sell. It assuredly is that simple. By Shauna Zamarripa

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any information provided does not constitute an offer or a solicitation to lend. Providing information to purchase does not guarantee a loan approval. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.
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