Definition of Market Value
Market Value refers to the price that a seller of real property can expect to receive from a buyer in a fair and open negotiation.
Market value is used by REALTOTS® to price the property, by mortgage lenders to determine whether a mortgage can be given against the property and of course, buyers and sellers in determining an agreed price.
Typically, the market value of a home or other real property, such as land, is determined by professional appraisers or real estate agents and is based on a variety of key factors.
Factors Affecting the Market Value
Items affecting the market value of property include the condition of the property, neighborhood location, demographics, prevailing mortgage rates, availability of credit and the housing situation at the time the property is on the market.
The old adage, “location, location, location” holds a great deal of weight in determining the market value of property. A 3 bedroom, 2 bath home in a good neighborhood may have double the market price of a comparable house in a lesser neighborhood. Demographics, including the quality of schools, traffic density, crime rate and cost of living will affect the market value.
Condition of the property has an effect on the property, depending on what type of repairs, if any, need to be performed. For example, a home with a leaking basement and shifting foundation will cost infinitely more to repair than a home that simply needs updated landscaping.
Lastly, mortgage rates, availability of credit and the market conditions also contribute to determining market value.
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Market Value and Mortgages
Obtaining a market value is essential in the mortgage process. The amount of money a lender can loan against a property is tied to how much the property is worth. Licensed Realtors will set and negotiate the sale price of a home based on their professional opinion of current market value. In addition, lenders and mortgage insurers will confirm that the agreed upon sale price is fair using either their own internal valuation system or through an appraisal. An appraisal is performed by an licensed appraiser with specialized training in determining a property’s worth and who is approved by the lender providing the mortgage financing.
Methods in Obtaining Market Value
An appraiser will use one of these 3 methods to obtain the market value of a property.
Comparative sales method – the appraiser will research recent sales in the area of the target property, obtain the sales prices, and compare the properties sold with the target property. The target property may increase of decrease in value depending on the condition and features of the properties compared. This is probably the most common method of determining market value.
Cost method – the appraiser will determine the cost of building the property in present dollars, and reduce the market value after deducting depreciation, or the remaining useful life of the property. The useful life is an estimate of how many remaining years certain components have before replacement is required (roofing, plumbing, electrical, etc.).
Income Method – this method is usually used for commercial or rental properties. An estimate of the net income a property can be expected to bring is multiplied by a factor of how many years an average investor would be willing to wait for a return on the investment. For instance, if a property will bring a net income of $3,000 per month, and an investor can be expected to wait 8 years for return, the property will have a value of $288,000. ($3,000 X 12 = $36,000 annual net income X 8 years equals $288,000).
At First Foundation, we know that an understanding of how market value is determined will make you a better buyer, and an educated mortgage customer. If you are in the market for a home, please contact us to discuss this and other questions regarding making a real estate purchase.
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