As a Realtor people often ask me how market value is determined. Sellers want to know their market value so they can decide on a fair asking price. Buyers want to know the market value of their home so they can see that the price of the home is justified. Here is the advice that I usually I give them.
Factors that Influence Market Value
Back in school, they taught us that market value is "what a willing buyer will pay and a willing seller will accept". That's definitely true. Here are some factors that influence market value.
1. Inventory - In a competitive market like we're in now, there aren't as many homes for sale. Supply is low and demand is high, creating bidding wars. A willing buyer will pay more for a property now than they would have a few years ago. Many people are desperate to secure the sale and they are willing to pay a higher price to beat out the competition. Market value is redefined each time buyers write an offer.
2. Home Sales - Recent home sales in the area also influence market value. You may have heard the term "comparable properties". The definition of comparable properties is homes nearby which are similar in size, age and condition to the subject property. These comparable homes will definitely be used to establish a home's market value. Buyers will look to see what homes have been selling for lately and will often base their offers on such. And appraisers will use these comparable sales to justify the current contract price.
Factors that Do NOT Influence Market Value
1. What a seller originally paid for the property does not determine it's current market value. It doesn't matter if they got a screaming deal on it just two years ago. It doesn't matter if they paid a crazy low price when they bought the home. They could have paid five dollars for the property. You are not going to benefit from the great deal they once got.
2. What your relatives in another state think the price "should be" doesn't determine market value. If your parents live in Texas, chances are they paid less for their 4,000 square foot, all brick rancher on 2 acres of land than you're going to pay for that 1,700 square foot 2-story home in Colorado Springs. Conversely, your sister in California paid more for her $925,000 townhome in Santa Barbara than you will pay for a spacious single family home in Colorado. An accurate estimate of market value needs to compare apples to apples, and we all know that home prices can really vary across different regions.
3. The public assessor's site property valuation is not actual market value. I don't know why, but the assessor's estimate is always under market value. And really, that's a good thing. Our property taxes are calculated on this, and if the county assessor thinks a home is worth less, then our property taxes are lower. Hooray!
4. Public internet sites are not always accurate with their valuations. For example, Zillow posts home values on their site and call these valuations "Zestimates". I constantly tell buyers and sellers not to believe the Zillow Zestimate they have seen. They are always low. To prove my point, NBC News recently reported a class action lawsuit was filed against Zillow for undervaluing properties. It turns out they are obtaining these valuations from the county assessors site. Interesting!
Realtors, the Best Resource for Market Value
Anyone can give you an idea of what they think your home will sell for, but they won't always be right, and it won't always be supported by data and facts. The only way to get an accurate determination of the market value of your home is to call a professional. Realtors live and breathe the housing market, and giving homeowners a market value on their home is a regular part of our job. When I meet with a homeowner to do a market value analysis, I will not only give you a value based on data and my many years of experience, but I will tell you how I arrived at the market value and all of the factors that were considered.