Fannie Mae’s Definition of Market Value

As an FYI for any readers, this is Fannie Mae’s definition of market value, which is contained in the Fannie Mae appriasal form (1004) that is used for most conventional loans:

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.

Examples: If you sell your house and include your red corvette in the garage as part of the sale, it probably wouldn’t fit the definition above because the buyer very likely paid a higher price for the house because of the machine parked in the garage (#5). Or if there are $50,000 of concessions contained in the purchase price, chances are that the buyer paid more for the house to get the benefit of money back, right? (#5) Or if a property is listed on the market for 1 day only, it may have been under-priced and not reflective of the market, right? (#3) (not always the case if a property goes quickly, but often so). Or consider when a family member sells to another family member and how the sales price is often much lower than it would have been if a non-family member purchased the house. This would very likely not be an arms-length transaction where each party is acting in his own best interest (#4). Or imagine a couple is getting divorced and they need to sell their house quickly. The house sells $30,000 below other recent sales in the neighborhood and so it does not fit the definition of market value (# 2 & # 3).  These are the types of issues that appraisers must consider constantly (and these are the reasons why speaking with local Realtors is a crucial part of our job. Having reliable and accurate information leads to better appraisals). 

If anyone has questions, feel free to contact me at 916-595-3735 or www.lundquistcompany.com