Market Value
Definition
Market Value refers to the theoretical highest price that a buyer, willing but not compelled to buy, would pay, and the lowest price a seller, willing but not compelled to sell, would accept. In real estate appraisal, the definition of market value used by agencies that regulate federally insured financial institutions in the United States is:
“The most probable price that 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 and knowledgeably, and assuming the price is not affected by undue stimulus.”
Conditions Implicit in this Definition:
- Buyer and seller are typically motivated.
- Both parties are well-informed or well-advised, and acting in what they consider their best interests.
- A reasonable time is allowed for exposure in the open market.
- Payment is made in terms of cash in U.S. dollars or financial arrangements comparable thereto.
- 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.
Examples
- Example 1: Appraisal Scenario: An appraisal of a home indicates its market value is $300,000. In a normally active market, the home should sell for this amount if allowed sufficient time on the market. However:
- The owner may deed the home to a relative for $10, which is far below market value.
- The owner may grow impatient and sell for $280,000.
- Conversely, an anxious buyer may be found who pays $320,000.
- The owner may provide favorable financing and sell for $340,000.
Frequently Asked Questions
1. What factors influence market value in real estate?
- Market value can be influenced by location, property condition, market conditions, comparative sales, and economic conditions.
2. How is market value different from market price?
- While market value is the estimated theoretical price, market price is the actual selling price, which could be higher or lower than market value.
3. Can market value change over time?
- Yes, market value can fluctuate due to changes in market conditions, economic factors, property improvements, and neighborhood developments.
4. Who determines the market value of a property?
- Market value is typically determined by a licensed appraiser who assesses various factors like comparable sales, property condition, and market trends.
5. How often should a property’s market value be re-evaluated?
- It’s advisable to re-evaluate a property’s market value every one to two years, or more frequently if there have been significant market changes or property improvements.
Related Terms
Appraisal: The process of estimating the market value of a property by a qualified appraiser, based on the property’s condition, comparative market analysis, and other relevant factors.
Fair Market Value (FMV): The price that a given property would fetch on the open market under normal conditions, similar to market value but often used for taxation and legal purposes.
Comparative Market Analysis (CMA): An evaluation of similar, recently sold homes in the same area used to help determine a reasonable price for a property.
Sales Comparison Approach: A method used by appraisers to assess the value of a property based on the sale prices of comparable properties.
Online Resources
- Investopedia Market Value
- Consumer Financial Protection Bureau - Real Estate
- National Association of Realtors
References
- The Appraisal of Real Estate, 14th Edition, by Appraisal Institute
- Schwann, Gregory M. “Appraisal Accuracy and Real Estate Sales Prices.” The Journal of Real Estate Research 12.1 (1996): 95-108.
Suggested Books for Further Studies
- “The Appraisal of Real Estate” (Fourteenth Edition) by Appraisal Institute
- Explores in-depth methods, practices, and principles around real estate appraisal.
- “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
- Comprehensive guide covering theoretical and practical approaches to professional real estate appraisal and valuation.
Real Estate Basics: Market Value Fundamentals Quiz
### What is considered the most accurate term for market value under U.S. regulated financial institutions?
- [ ] Optional Price
- [x] The most probable price
- [ ] Earned Price
- [ ] Negotiated Price
> **Explanation:** The term "The most probable price" reflects the consensus definition by agencies governing federally insured financial institutions.
### Who typically determines the market value of a property?
- [ ] The buyer
- [ ] The seller
- [x] A licensed appraiser
- [ ] A real estate agent
> **Explanation:** A licensed appraiser primarily determines the market value of a property using methodologies aligned with industry standards.
### Which factor is not considered when determining the market value?
- [ ] Comparative sales
- [ ] Property condition
- [ ] Market trends
- [x] The color of the building
> **Explanation:** Cosmetic aspects like the color of the building do not have a material impact on determining a property’s market value.
### What is a key element that must be present for a fair sale process?
- [x] Both parties are well-informed
- [ ] The property is overly promoted
- [ ] The seller must accept a low bid
- [ ] The sale must be closed within a week
> **Explanation:** Both parties being well-informed ensures a prudently negotiated sale under fair market value conditions.
### How does market value differ from market price?
- [ ] They are the same
- [ ] Market price is theoretical
- [x] Market value is theoretical, while market price is the actual selling price
- [ ] Market price is never more than market value
> **Explanation:** Market value is an estimated theoretical price, with the market price being the actual realized selling price.
### Which scenario most likely reflects market value influence?
- [x] An appraised home listed for $300,000 sells at $298,000
- [ ] A home bought impulsively for $320,000
- [ ] An immediate sale at a below-value price due to urgency
- [ ] A property transferred within family for nominal consideration
> **Explanation:** Selling close to the appraised market value in a reasonable time typically reflects underlying market forces.
### What kind of payment arrangements may correctly reflect market value?
- [ ] Barter trading non-cash goods
- [ ] Loan fully deferred by the seller
- [x] Cash in U.S. dollars or comparable financial arrangements
- [ ] Cryptocurrency payment only
> **Explanation:** Payments should ideally involve cash or financial arrangements of comparable value recognized by market participants.
### To ensure the property is fairly listed, exposure in the market should be for a:
- [x] Reasonable time
- [ ] Minimal possible timeframe
- [ ] Indeterminate period
- [ ] Restricted time mandated by buyer
> **Explanation:** A "reasonable time" akin to prevailing market norms ensures adequate exposure for transparent valuation.
### What sensation should ideally be removed to assess correct market value?
- [x] Undue stimulus
- [ ] Excitement
- [ ] Potential increase speculation
- [ ] Incremental bidding terms
> **Explanation:** The absence of undue stimulus ensures property pricing is based on actual, equitable valuations rather than external pressure.
### Does personal financing directly define market value?
- [x] No, it should be unaffected by special or creative financing
- [ ] Yes, it greatly influences value
- [ ] Only in volatile markets
- [ ] Always determines value irreversibly
> **Explanation:** Standard practices prescribe that market value remains independent of subjective financing schemes, ensuring objectivity.
