Question: What establishes market value?
I think the best place to start is with what does not affect market value.
Sellers often say things like, “I know that my neighbor’s house sold for….” or “We owe $175,000 and we have put $50,000 in to it, so we need to sell for $225,000”, or “Well, we paid $250,000 three years ago so I just can’t sell it for less than that.”
Unfortunately, it is irrelevant what your neighbor’s home sold for unless it is a very similar home, in very similar condition, and within the last six months. More often than not, a potential seller client is holding on to a sold comparable from two years ago. Well, that was a different market and will not be relevant to a buyer’s lender when it comes to the appraisal. What you owe on a home, or what you have put into a home does not translate directly into market value. If you bought in 2006 when the market was crazy hot and now you are selling in 2013 after seven years of depreciation, you may be facing that same sales price today. Or even less.
Also, home improvements will add, on average, about 55 percent of the total investment back into the market value. So on a 50,000 home improvement project, a seller will recapture $27,500 at the time of resale.
The last one is a tough one. It is very hard for a seller to face selling a home for less than what they bought if for. As a listing specialist, it breaks my heart every time I have to reveal a market value that is less than the original purchase price. This next point is very important to me, so please read it carefully. If you are a seller facing this situation, IT IS NOT YOUR FAULT.
Why is it that we can accept that a stock worth $50 dollars a share one day can be worth $5 a share the next, but we cannot accept that over a seven year period real estate values have suffered? I think it is because appreciation was just a given for the longest time. It was a constant. And now that the market has corrected itself, appreciation has returned.
Today, I often hear buyers say, ” I want to get a deal, maybe 10 to 15 percent below list price,” or ” What did the seller pay for the home?” or “The tax records have it valued at….”
“Deal” is a loaded word. What is a deal? Sometimes a deal is full list price. Sometimes the listing agent has underpriced the home due to lack of preparation on their part and full list price is a great deal. Or perhaps a buyer must accept that financing a home at less than a 4 percent interest rate over 30 years is their deal.
What a seller paid for a home is good information to have, though it bears very little when it comes to market value. When a stock sells, the prior purchase price is irrelevant, correct?
Finally, the county tax assessment is purely for gauging taxation. It’s intended use is not to establish market value.
Now, the answer to the original question. Market value is established by sold and pending comps (similar homes) from the last 6 to 9 months in the direct vicinity of a subject property. After that, a home is worth what a buyer is willing to pay for it and a seller is willing to sell it for.
This weekly sponsored column is written by Chad Taylor of the Taylor-Made Team and Keller Williams Realty Key Partners, LLC. The Taylor-Made Team consistently performs in the top 3 percent of Realtors in the Heartland MLS. Please submit follow-up questions in the comments section or via email. You can find out more about the Taylor-Made Team on its website. And always feel free to call at 913-825-7540.
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