What Is Market Value of a Home?
If you’ve recently purchased a home or are in the process of buying or selling a home, you may have heard the words “market value” and “market price” said by your real estate agent. But what do they mean, and how do they impact the selling and/or buying of property.
What is market value?
Market value is someone’s professional opinion of what the house would sell for, in its current condition, for a reasonable amount of time. For most real estate markets, a reasonable amount of time tends to be between 30-90 days.
What is market price?
Market price is what someone is willing to pay for a property, based on the features of the house, the location of the house, and the market value of the house.
How do market value and market price impact each other?
Sellers need to know the market value of the property because it helps them list the home at a price that is fair for the current housing market, yet competitive enough to either pay off an existing mortgage on the property or make some kind of profit.
Buyers need to know the market value so that their offers are in line with what the house is worth. If they’re getting financing from a financial institution to buy the house, the value determines how much they’re able to borrow.
Seems pretty simple, right? You find out the value, and then you price it accordingly if you’re selling or make an offer if you’re buying.
Ah, but then there’s supply and demand.
Market value and market price are influenced by supply and demand.
Home values can spur increased demand. Increased demand can encourage sellers to raise the price. If someone has something you want, you may be willing to pay more to get it.
A few years ago, people were paying thousands of dollars for sponge cakes on a popular auction site because the company that made them was closing and people were afraid they’d never have another sponge cake. They also hoped that later, people who wanted the sponge cakes would pay them more than they paid for them. Then, the company ended up getting bought by another company and sponge cake production resumed. The price of the sponge cakes dropped back down to normal rates and there were several thousand people left holding $2,000 snacks, wondering what the heck to do with them. This same logic applies to homes, too. The need for homes influences the demand for homes. The demand for homes influences the price and value of the homes.
Buyer's market versus seller's market
Supply and demand is what helps determine if the current housing market is a buyer’s market or a seller’s market.
A buyer’s market indicates that there are more houses than there are buyers. Sellers compete with one another to try to get their home sold quicker. They may make improvements to their homes, offer to cover closing costs, lower their listing prices, or involve very motivated real estate professionals who will do whatever it takes to get the house sold. A seller’s market is the reverse. There are more buyers than houses available. So those who happen to have a house for sale get to reap the benefits of more offers, higher offers, and a faster sell. According to a recent study by CoreLogic, the average gain in equity per homeowner from mid-2015 until mid-2016 was $11,000. This means that supply and demand influenced the value of property, creating more equity for homeowners. The map below shows the average increase per state for homeowners. Those on the west coast experienced a pretty significant increase.
How is market value determined?
So, with all this talk about supply and demand, how do you figure out the true market value of a piece of property? Is it just an educated guess? Can you do anything to change it? If you’re selling, you could check out comparable properties in your area on real estate websites like Zillow or Trulia, to get an idea of what homes are selling for. Keep in mind, though, that homes in different places will sell for different prices, even just a few blocks away. Several factors can impact a home's value, so you need to take into consideration proximity to shopping, transportation, parks, and schools. When you’re thinking of listing your home, you may be able to raise the price because of the enticement of the quaint little shopping district within walking distance, or lower the price because there’s an interstate that zooms past your back yard. To eliminate all of the guessing, you need to find a professional real estate appraiser. These are people who make it their career to assess homes and take into consideration all of the things mentioned above. You will have it on paper for your real estate agent if you’re listing your home. If you’re buying and are getting financing, your lender will require an appraisal to make sure the property is worth at least the amount you are requesting. It also helps them determine if there’s a need for private mortgage insurance, depending on your down payment.
The appraisal
The real estate appraiser will use one of three appraisal methods: the sales comparison approach, the income approach, or the cost approach.
Sales Comparison – compares the price per unit of similar properties in the surrounding area
Income – typically used for commercial or investment properties, evaluates the income potential for a property
Cost – value of the land plus the cost to replace a structure built on the land. Also may be used by insurance agents to determine the cost to rebuild or replace the home after a disaster.)
For typical real estate transactions, the sales comparison approach is used. Your appraiser will do a comparative market analysis, comparing your property to others. He may also take into consideration the other appraisal methods, if needed, to establish a value.
They’re not influenced by the seller’s need to sell the home or the buyer’s need to buy the home. I’ve heard of people who have written letters to their appraisers asking them to establish a certain value. They can’t do that. It’s illegal and most lenders monitor their appraisers very closely to make sure they uphold ethical and professional standards. This is good news for you because you’ll know that the appraisal is unbiased. If you’re buying and disagree with the assessment, please contact your lender to find out what steps you can take to get another appraisal. If you’re selling, you can dispute the value with your appraiser and provide him or her with your own comparative analysis or even another appraisal if one was done. Keep in mind, this may or may not change the value. If you believe your appraiser didn’t complete the appraisal correctly, you can contact the state agency that oversees appraisers in your area. When it comes to buying or selling a house, you’ll need to keep in mind that market price and market value both influence the success of your transaction. There are [things you can do to increase the attractiveness of the property if there’s nothing you can do about the actual market value or even the price. If you have any questions about how market value impacts your purchase, please contact a lender. If you have questions about how market value impacts your sale, please contact a real estate agent.