I have written several articles on market value in recent years because the term is widely used but often poorly understood.
In a broad sense buyers determine values with their ability and willingness to pay for a house. We can list our houses for $1 million but if no one is willing or able to pay that much then the list price is simply speculation.
So isn't a buyers purchase offer market value for a given property? Maybe. Some buyers are not well informed, and make purchase offers not supported by other similar sales. And buyer preferences play a part.
Consider a house listed for sale for $150,000. A buyer makes a full price offer based on the property's location adjacent to a school. They like the fenced back yard, and the fact that the house has a well and septic system so they don't have to pay for
city water and sewer. Unfortunately the buyers credit is questionable, and they cannot get a mortgage. The house is relisted for the same price.
Now a 2nd buyer views the house. They need to purchase since their house is under contract. They don't like the location next to the school, and hate the fenced back yard. And they really wanted city utilities. Since they need to move and the house is
in their price range they offer $145,000 and the deal closes a month later.
So what is the market value of this property? From an appraisal perspective the market value is likely $145,000. I say likely because other factors may come into play including concessions and creative financing. But assuming other similar houses sell
in the range of $145,000 then that is market value on the date of sale.
Buyer perception and motivation plays a major role in determining values. Changing interest rates, housing inventory levels, new construction, and local and national business and economic factors come into play. So the next time some one uses the term
market value, ask which definition they used and how they arrived at their conclusion!
There are plenty of myths regarding appraisals and what we look for when inspecting a house. I've broken the inspection down into five very broad categories to help homeowners and other users understand the process.
1. Design and Quality - Does the house fit in with other houses on the street and neighborhood? Is it a similar quality? In my area ranch homes dominate the market, but two story homes are present and accepted by many buyers. Are there enough bathrooms?
A five bedroom house with one bath may sell for a lower price than a two or three bath house.
Quality refers to the quality of construction. Is the house a basic house with few features and inexpensive materials? Does it have higher quality windows, doors, tile roofing, many offsets, 10' ceilings?
2. Condition is the next item I address. This ties into the age of the property, and addresses the depreciation present. I look at the flooring, cabinetry, counter tops, bath fixtures, and other systems to see if they have been well maintained, or updated. Updates
and renovations can have a significant impact on the sale price of houses, especially older houses.
3. Amenities include items such as a fireplace, swimming pool, spa, extra rooms, decks, sheds or barns, fencing etc. Again these items may have a significant impact on values.
4. Living Area is the total area used for living space. Living area is heated and cooled in most areas of the country. Fannie Mae does not generally consider a basement as living area even though it may be finished and heated/cooled. However, a finished
basement may contribute to the value of the house and likely will be considered in an appraisal. For single family housing the living area is determined by measuring the exterior of the house, excluding porches and garages. Condominium living area is measured
from the inside of the unit.
5. Safety and habitability refers to any hazardous or unsafe conditions or features in the house and surrounding neighborhood. Exposed electrical wiring, mold and mildew, pool fencing or screening, missing railings, broken windows all can be considered
a hazardous condition and may have to be repaired before closing.
These are just a few of the items we look for when appraising a house. There are too many items to list individually. By making sure your house is safe and accessible the appraisal process will be quick and easy!