Market Price

Market Price: An In-Depth Look

Definition

Market price refers to the actual price at which a property or asset is sold in a transaction occurring under normal market conditions. This price may differ from the asset’s market value, which is an estimation of the asset’s worth as determined by factors such as appraisals, assessments, and comparative market analyses.

Examples

Residential Sale: A house listed for sale at $300,000 was appraised for $293,000. However, the final negotiated sale price was $295,000. In this case, the market price is $295,000.
Commercial Property: A commercial building was listed for $5 million but the buyer conducted an inspection showcasing needing major repairs. Both parties agreed to close the deal at $4.85 million. The market price of the property is therefore $4.85 million.
Raw Land Sale: A parcel of land was on the market for $200,000 and valued at $205,000 by a local appraiser, but it was sold for $198,000 due to urgent need of the seller to liquidate. The market price is $198,000.

Frequently Asked Questions (FAQs)

Q: What is the difference between market price and market value? A: Market price is the actual price at which a sale occurs, while market value is a theoretical price determined by an appraisal or market analysis.

Q: How is market price determined? A: Market price is determined through the negotiation between a willing buyer and a willing seller under normal market conditions. It reflects the agreed-upon price at the point of transaction.

Q: Can market price exceed market value? A: Yes, during competitive scenarios like bidding wars, the market price can exceed market value as buyers might be willing to pay more than the appraised or assessed value to secure the asset.

Q: Does market price include transaction costs? A: No, market price refers solely to the sale price agreed upon between the buyer and seller. Transaction costs, such as broker fees, closing costs, and taxes, are additional expenses.

Market Value: The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller.
Appraised Value: A professional assessment of a property’s value, typically conducted by a licensed appraiser.
Assessed Value: The dollar value assigned to a property to measure applicable taxes, usually set by a tax authority.
Fair Market Value (FMV): The price at which property would sell under normal market conditions, reflecting the interplay of supply and demand.
Arm’s Length Transaction: A deal in which the buyers and sellers have no relationship to each other and negotiate independently for their self-interest.

Online Resources

References

Jaffe, Austin & Sirmans, Gaines. Real Estate: An Introduction to the Profession. Wiley.
Brueggeman, William B., and Fisher, Jeffrey D. Real Estate Finance and Investments. McGraw-Hill Education.

Suggested Books for Further Study

Fisher, Jeffrey, and Martin, Dennis. “Income Property Valuation.”
Brown, David M., and Matysiak, George A. “Real Estate Investment: A Strategic Approach.”
Taff, Lorene. “Real Estate Appraisal: From Value to Worth.”

Real Estate Basics: Market Price Fundamentals Quiz

### What exactly does market price reflect? - [x] The actual agreed-upon sale price of a property or asset. - [ ] The price listed by a real estate agent. - [ ] The appraised value given by a licensed appraiser. - [ ] The estimated value from a market analysis. > **Explanation:** Market price reflects the actual sale price agreed upon between the buyer and seller in a real-world transaction. ### Can the market price of a property be less than its appraised value? - [x] Yes, it can be less. - [ ] No, it must always be more. - [ ] The market price and appraised value are always the same. - [ ] The market price cannot be determined without an appraisal. > **Explanation:** Market price can be less than the appraised value based on various factors such as urgent need of seller for liquidity, overriding market conditions, or physical state of the property. ### How does market price differ from market value? - [x] Market price is the actual sale price, while market value is an estimated value. - [ ] Market price is always higher than market value. - [ ] Market value is used for tax purposes, while market price is not. - [ ] Market price includes transaction costs, while market value does not. > **Explanation:** Market price is the actual sale price agreed upon between buyer and seller, whereas market value is a hypothetical value mainly influenced by appraisals. ### Who determines the market price of a property? - [ ] A licensed appraiser - [ ] A real estate agent - [ ] A tax assessor - [x] Buyer and seller through negotiations > **Explanation:** The market price is determined through negotiations between a willing buyer and a willing seller under normal market conditions. ### Can transaction costs impact the market price directly? - [ ] Yes, transaction costs always affect the market price. - [x] No, market price and transaction costs are separate considerations. - [ ] Transaction costs invalidate the market price. - [ ] Transaction costs and market price are considered together for final sale valuation. > **Explanation:** Transaction costs do not directly affect the market price; they are additional expenses in completing the real estate transaction. ### Why might a property's market price exceed its market value? - [x] Competitive buyer activity such as a bidding war. - [ ] Changes in local zoning laws. - [ ] The property’s location alone. - [ ] The property failing to appraise to its listed price. > **Explanation:** In cases of competitive buyer activity, such as bidding wars, the market price could exceed the appraised market value since buyers might be willing to offer more. ### What type of transaction reflects typical market price settings? - [ ] Related party transactions - [ ] Forced sales or auctions - [x] Arm’s length transactions - [ ] Private sales between related parties > **Explanation:** Arm’s length transactions—where neither party has a prior relationship with one another—are the basis for typical market price determination. ### What is the market price called in a transaction without pressure or compulsions on buyer and seller? - [x] Fair Market Price - [ ] Assessed Value - [ ] Liquidation Value - [ ] Taxable Value > **Explanation:** The term “Fair Market Price” is used for a transaction occurring without any undue pressure on either the buyer or seller, reflecting a normal market condition agreement. ### When does the market price mostly align with the appraised value? - [ ] In distressed property sales. - [x] In a balanced real estate market. - [ ] During a real estate crash. - [ ] During economic boom. > **Explanation:** The appraised value and market price align closely in a balanced real estate market with stable demand and supply conditions. ### Does either market value or market price factor in future interests? - [ ] Yes, both factor in future interests. - [x] No, both assess the property as of the valuation date. - [ ] Only market price considers future interests. - [ ] Only market value considers future interests. > **Explanation:** Both market value and market price deal with the property as of its current valuation date and do not include speculative future interests.