Market Value

One of the most important things that will help in pricing your home is the concept of market value. It should be well noted that market value is not an exact science, but was actually introduced as a business tool. And regrettably the definitions surrounding it are terribly deficient in describing the nuances and subtleties of what “the market” is too.

Stiffly stated, “market value” is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion. The problem with that definition, especially in real estate, is that there is hardly ever a situation where a party can act without compulsion. And in this current market, we seem to find everywhere heavily motivated sellers (i.e. short sellers & bank-owned foreclosures). Rarely is the equation on both sides of the negotiating table balanced. And to make matters worse, every property is inherently unique, if not by construction then always by location. Simply put, it is describing an imaginary perfect scenario.

Practically stated for real estate purposes, market value is estimated amount at which a seller can maximize the sale of his or her property, and is sometimes presented in a range. Rarely will you ever hear of the ‘lowest market value’ of a property because that is too variable on the individual seller. What is usually described is the “sliding scale” relationship of price & days on market. The higher the listing price, the higher liklihood that it will stay on market longer. The lower the price, the more likelihood it will sell more quickly. No matter what the house looks like or where it is located, this will always be true.

The main takaway here is that market value is simply an estimate. Market values can fluctuate for a variety of reasons and factors and cannot be controlled. Though they can certainly be influenced on the long term aggregate level by policymakers, often to ill effect (but that is another story!). Because of this fact, you may have heard an investor from any industry say “you make money on the purchase, not the sale”.

That is why it is so much more important to understand what tools are used to estimate market value, and to understand they are estimates. Click here if you would like to learn how real estate professionals and appraisers evaluate property.