What is market value? Does it depend on who you ask or is there a definitive answer? Let’s take a look at an image below to help illustrate Fannie Mae’s definition of market value – which is what appraisers use in their reports. Knowing how to think about and explain this definition can be really helpful when working with buyers, sellers, and appraisers – especially in a market with many overpriced properties right now. I created the image below, and I hope it’s a helpful visual.
KEY POINT: One buyer might be willing to pay more than anyone, but how much would most buyers pay? If you lined up 100 buyers, what would most of them pay for the property? That’s what the appraised value should represent.
The Definition of Market Value from Fannie Mae: 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.
NOTE: There are other definitions of value that appraisers use for different types of appraisals, but most mortgage finance transactions will use Fannie Mae’s definition of value.
I hope this was helpful.
Question: Any thoughts on stories to share? I’d love to hear your take.
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Market value — that is a tough one. I would think market health would be part of it. That is, the more houses bought and sold, the more reliable the measurements of the market. All I can figure is that the low Fed rate is keeping real estate in stasis.
Definitely, Ricardo. There has to be enough data to discover market value too. I say “discover” because it a process of sifting various metrics, understanding neighborhood dynamics, and being in tune with the motivations of buyers and sellers too. Yes, low rates are helping to keep values higher right now, so buyers have been able to pay more for properties.
I think most people get confused with the “most people” part. I’ve heard that market value should be whatever someone is willing to pay for something but unfortunately that is not what an appraiser measures. Great graphic by the way.
Thanks Tom. Well said. I agree about the “most people” part too. I find painting a picture of market value with this image is a great conversation piece. Hopefully it helps.
You mean market value is not some number I can just pull out of the air because I over invested in my house and it “IS” worth more than every house in my neighborhood? And then some wonder why their house did not sell or failed to meet the appraisal and then did not sell.
Thanks for sharing Ryan. The definition you posted above should be mandatory reading material for home buyers and sellers everywhere.
Thanks Paul. I really appreciate it. It makes such a huge difference when the definition of market value is understood by all parties in a real estate transaction. I was actually just talking about this at a class today. The moment we can pull a number out of thin air to make it a value reality will be the moment I sell my primary home for twice what the comps suggest. 🙂 You take care. Thanks again.