If a buyer and seller agree on a price, that’s market value, right? I ask this question all the time during real estate presentations, and responses are mixed. There are passionate yeses, but there is also a bit of hesitation. Ultimately having a good framework for market value is incredibly useful when working with buyers & sellers – not to mention appraisers. Let’s consider 10 quick scenarios to test the concept of a buyer and seller’s price equaling market value.

Quick Test: Which one example is a good picture of market value?

1. An out-of-area investor is paying $30,000 higher than any recent sales.
2. A short sale is in contract 10% lower than any sales or listings.
3. A buyer really needs to find a home, so she offers more to close quickly.
4. Grandma sells her house to a grandson for 25% less than all other sales.
5. A seller is giving the buyer artwork and a car if the buyer closes at X amount.
6. There were zero offers at $350,000 after 150 days, but now there is a contract at $350,000 with a $30,000 credit for the buyer.
7. A property has been on the market for a reasonable period of time, was priced at a reasonable level, and had several offers at list price.
8. An FHA offer is $13,000 above all others in hopes of getting into contract.
9. A builder can’t sell units at the same price level as last year since the market softened, so the builder is offering fat credits to help keep prices high.
10. A buyer wants to live next door to an aging parent, so the buyer offers $40K above any recent sales or listings.

Contract Price vs. Market Value: Can you see why a buyer and seller’s agreed upon price might not represent market value? A property can get into contract at any price level, and both the buyer and seller might agree with that price, but the price might not represent what the rest of the market is willing to pay (see “100 buyers vs 1 buyer” below). Of course if you’re paying cash, you can define “market value” however you want, but if there is a loan involved, Fannie Mae’s definition of market value comes into play.

Fannie Mae Definition of Market Value: Market value is 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. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

100 buyers vs. 1 buyer: If you lined up 100 buyers, how much would most of them pay for a particular property? That is a good picture for market value from an appraisal standpoint. If you are listing a house or coaching buyers on making an offer, it might be helpful to think about value this way because it is more in tune with how an appraiser is likely going to be thinking about value. Does that make sense?

Questions: Do you agree with the definition of market value? Why is it important to define what market value is? What is example #11?

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