Fair market value is a term you’ll often hear when dealing with real estate. Typically it’s bandied about when discussing the potential list price for a piece of property. In a perfect world establishing fair market value would be as simple as scratching off a lotto ticket to reveal a magical price. But in fact, it is not that simple and quite frankly, I’m not so sure there is such a thing as Fair Market Value.
In its simplest context (pulling from multiple definitions), fair market value can be described as the price that a property or asset would fetch in a marketplace subject to the following conditions.
- Both buyer and seller are willing, able and knowledgeable about the asset
- Both buyer and seller are acting in their own best interests
- There is no undue pressure on either party
- A reasonable time period is given for the transaction to be completed
Now, raise your hand if you see any holes in that definition as it pertains to a real estate transaction.
I can count on one hand the number of transactions that I have taken part in where all four elements were met. In all honesty, its tough to find any reasonable situation where all of those criterion are present – especially real estate.
Why? Well, “fair market value” and “intrinsic value” are two completely different things.
When all is said and done, the price will ultimately reflect a place where the buyer has decided that the house is worth more to them than the money they are trading for it and the seller has determined that the house is worth less to them than the proceeds they will receive in return. There are many intrinsic and extrinsic variables that play into that equation.
To complicate matters further, both parties are often working inside of their own time parameters which adds an element of outside pressure to make a particular decision. A seller has accepted a job in another part of the state and she knows that it’s in her best interest to sell the house before she leaves town – one less thing to worry about. A buyer has less than two months remaining on an existing lease and has already given notice of intent to move out. Then there is the buyer who is also a seller (selling an existing home) that has to find a new house to purchase before he closes on his sale or else his things are in storage and hes sleeping on someone’s couch. These dynamics are never static and circumstances are always evolving.
None of that even takes into consideration the time of year or competition from other listings/buyers in the neighborhood.
Fair Market Value is an ideal that just doesn’t really exist. Sure, a property appraisal completed by a professional may come close to indicating the legitimate value of a particular property. But, remember that assessment almost always comes after the fact; after the buyer and seller have made their decision based on what’s important to them. On top of that, an appraisal is most often constructed using information drawn from previous purchases in the same area made by, you guessed it, other buyers and sellers under the same circumstances.
I’d propose that there are actually 3 prices for every piece of property: what the seller hopes to sell it for, what the buyer is willing to pay for it and the only one that really matters – the one in black and white on the HUD settlement statement on the day of closing. IF, both buyer and seller truly are willing, able and knowledgeable about the situation that price can come very close to reflecting fair market value. Far too often the situation is too complex for that to be the case.
That’s what makes this business so intriguing. As a Realtor, it’s about how can you take the existing circumstances of a buyer and/or seller and mold them into a sound strategy that yields the best possible outcome. For a seller, its educating on the importance of property presentation, home staging and pricing segmentation to stimulate a demand that garners a higher than average sales price to list price ratio while minimizing the number of days on market. For a buyer its helping the client put him/herself in the best situation to negotiate the price and terms of a contract that best suits his/her long term objectives. Its helping both parties to establish a clear focus on what is most important to them and staying aligned with that through the entire process.
In that regard choosing the right person to work with can be invaluable.
Flickr photo credit to Jens Dahlin
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