Market Value vs Market Price
June 23rd, 2009
Categories:Home Buyer Education
Appraising a home is a very detailed and methodical way to reach an opinion of value. While an appraiser is skilled at acquiring the most relevant amount of information possible and using that information to determine the value of a home, there is always a human factor involved with the market price.
To put it simply, a home may be valued at a certain, number but it will always be the home buyer that determines the price it will sell for.
Market Value
The goal of an appraiser is to estimate the most probable price a home will sell for in the current market, this is referred to as the market value. The market value has three assumptions about the transaction.
- The sale occurs in an open and competitive market
- The buyer and seller both act prudently and with knowledge
- The market value depends on the price not being affect by unusual circumstances
These additional factors are essential to determining market value
- The most probable price is not the highest price or the average price
- The buyer and seller are unrelated and not acting under undue pressure
- The buyer and seller are both well informed about the property’s condition and future use
- A reasonable amount of time is allowed for exposure in the open market
- Payment is made in cash or the equivalent (mortgage)
- The price is represented by normal financial consideration. In other words, the price is not altered to factor in special financing, services, fees or credits.
Market Value versus Market Price
- Market value is an opinion of value based on a detailed analysis of relevant data.
- Market price, is the price the property actually sells for.
In theory these numbers should be the same, but as noted in the introduction, there are factors human and environmental in nature that can effect the selling price. In some instances, the buyer will determine the sales/market price is significantly higher than the market value. In this instance, the lender may not fund the loan because the price is higher than they can reasonably expect to sell the home for in the event the home is given back to the bank. (foreclosure)
Market Value versus Cost
One of the most common misconceptions of homeowners is the cost of the home is the value of the home. Here is a common example: a homeowner purchases a home for $200,000 and after moving in install a $50,000 pool. The homeowner will commonly be under the impression the home is now worth $250,000. Unfortunately the most an appraiser typically gives for the value of a pool, (no matter how large) is $15,000. In this case the home value would be worth $215,000.
Related posts:
- Three Approaches to Real Estate Value
- Real Estate Market Update
- The 9 Principals of Value
- Seller's Market in 2009, What's Going On?
- What Closing Costs Do You Have to Pay for at the Closing Table?
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