What is the Market Value of my Property?
The meaning of “market value” confuses many people. Try to think of the relationship between property value and the number of buyers in a specific market as a triangle.
At the peak of the triangle is the “one-day-my-prince-will-come” price where there is a theoretical buyer for whom the property holds extraordinary value. Waiting for this buyer, particularly if the property has no truly unique features, may take forever. Usually, buyers who have the money to spend considerably more than market value will choose to move up to a more prestigious neighbourhood instead.
At the base of the triangle, is the price that is attractive to everyone whether they are currently shopping for a home or not — the “fire sale” or “it’s-a-steal” price that no one can pass up (and no informed seller will offer).
Market value for a property lies between one-third and one-half of the way up from the base, depending on market conditions and the seller’s circumstances. When a property is listed at a price, which reflects fair market value, the greatest number of buyers will see value in the property within a reasonable time. Figuring out the market value of a property requires careful analysis of buyer characteristics and goals as well as previous and current real estate listing and sales data for the area.
A real estate salesperson, with experience in the area and an understanding of current buying patterns, can help the owner establish a list price that will entice buyers, yet nett the seller the greatest possible return. Market value is simply the price at which something will sell within a reasonable period of time.
Here is our definition: Market value is the price at which a particular property, in its current condition, will sell within 30 to 90 days.
Three elements of the definition:
- Particular Property
- Current Condition
- Sell within 30 to 90 days
The only real measure of market value is what a particular property sells for. How can you predict how much someone will pay for your property in the future? The estimation of property value is part art and part science. An appraisal is only an opinion, an educated guess.
Let’s start learning to predict market value by analysing each of the three elements of our definition.
1. The particular property.
When you determine market value, you must always remember that you are estimating the market value of one particular property. The location, or neighbourhood, of this particular property is the starting point for your investigation. The same property in the next suburb, or even on the other side of the same city, is not relevant to this determination. Although this may seem like an extreme example, property prices throughout the country fluctuate significantly from city to city and from neighbourhood to neighbourhood. Therefore, whenever you determine the market value of one particular property, you should try to compare it only with similar properties in the same or nearby neighbourhoods. This is what your potential buyers will do
2. Current condition
Next, you must assess the current condition of the particular property. The current condition determines the number of buyers who are interested in purchasing the property, which affects the amount of time the house remains for sale on the market before it is sold. Most homebuyers want to buy the best looking house on the street. Is the house gorgeous and ready to move into? Or is it a dump that needs a major renovation? Simply subtracting the amount of estimated repair costs from the selling price of other similar houses in the same neighbourhood is not an accurate way to determine current market value for a particular house.
If a house in good condition could sell for $180,000 and the house you are interested in needs $4,000 worth of repairs, that does not mean the current market value of your house is $176,000.
Here’s why: Far fewer buyers want to buy a house that looks run down. When a house attracts fewer buyers, it takes longer for the house to sell. To attract more buyers and sell the house sooner, the price must be reduced by much more than the mere cost of repairs.
Although the current condition of the house is an essential element of market value, it is almost impossible to determine exactly how much the physical condition of the house affects its value. This simply is not an exact science. As a general rule, you should be fairly safe if you subtract two to three times the amount of the fix-up costs.
3. Sold within 30 to 90 days
In a normal real estate market, if a house doesn’t sell within one to three months (30 to 90 days), the reason is simple:
Even perfect properties don’t sell within this time frame if the price is too high. On the other hand, if a house sells within one to two weeks, the asking price was probably too low. A house that sells within one to three months is normally priced at the true market value of the house.
Imagine this scenario:
It will take a year to sell a particular house for $300,000, six months to sell it for $290,000 and one week to sell it for $270,000. The price that will sell this house within one to three months lies somewhere between $300,000 and $270,000. The price that will sell this house in one to three months is probably right around $280,000, its true market value.
Market Value is simply the price at which something will sell within a reasonable period of time.
Tips on setting the right listing price:
- Try and see things from the buyer’s point of view. Buyers do not care how much you paid for your home, how many memorable moments you and your family shared in the home, or how much money you need to buy your next home. Sales prices are a product of supply and demand. The value of your home relates to local sale prices. It is important to have your selling agent create a Comparative Market Analysis (CMA) of recent comparable sales in the area to show the buyer why your home is worth the asking price.
- Your own needs can impact the sale value (for example if you must sell quickly you may need to set a lower sale price).
- Consider the market conditions. Are home prices in your area trending upwards or downwards? Are homes selling quickly or languishing?
- Will your home be on the market in the spring home-buying season or the dead of winter? Are interest rates attractive?
- Is the local job market strong?
- Is the economy hot or cold?
- Set your price to allow a bit of room for negotiation.
- The asking price or reserve price should not be so high that it frightens genuine buyers from making an offer.
- Try to price the property no more than 5% above the conservative market value to allow for some negotiation