The Price is Right…Or Is It?

“I have a purchase agreement for $100,000 on my home.  That’s market value, right?”

Oh, if I had $1 for every time I heard that.  I might still be writing this blog post, but I would be beachside, instead of in front of my office computer!  Just because someone  has a contract on their home for, let’s say, $100,000, that doesn’t automatically mean the market value is $100,000.  There’s an often overlooked phrase in most definitions of Market Value:  the knowledge of the parties.

The most widely accepted components of market value are incorporated in the following definition:

“The most probable price that the specified property interest should sell for in a competitive market after a reasonable exposure time, as of a specified date, in cash, or in terms equivalent to cash, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeable, for self-interest, and assuming neither is under duress.”

The definition of market value used by agencies such as Freddie Mac & Fannie Mae includes the following:

Both parties are well informed or well advised, and acting in what they consider their best interest.

If a buyer or a seller isn’t well informed or advised, your contract price might not be market value.

Here are just a few examples of when a purchase price might not equal market value, due to lack of knowledge:

1. The seller isn’t aware that that a major employer has announced they are leaving town, which will likely result in decreased market values (high supply of homes + low demand = lower prices).
2. The seller has never lived in the home, and is unaware of the condition of the home, or the market influences of the neighborhood.
3. The buyer’s agent fails to do their own research on market values in the area, taking the listing agent at their word – when in fact, the listing price was inflated.
4. The buyer is unaware of hidden defects in the home that could seriously affect the value.
5. The buyer is from out of town, not aware of the local market, and purchases a home by owner, without any representation.

So remember:  Sometimes the price is right.  And then, there are those occasions where not everyone really knows all they need to.  If you’re a buyer or seller of real estate, cover your bases — educate yourself and make sure you really are paying – or getting – true market value for your home.