Market Value of Home – What Makes Up Your Market?
When considering the true market value of your home you have to look at what makes up the market. The market area typically consists of homes which have sold within 1 mile of your house and share similar size and design. Seems pretty simple, it’s not, now within every market there are on average 2 to 3 submarkets. To keep it simple look at it this way:
- The majority of the sales fit into a sub-market of arm’s length transactions. This means a typical seller / buyer transaction. The home is listed on the public market for a reasonable amount of time and the seller and buyer are not unduly motivated.
- The second sub-market in most areas consists of distressed sales which would be short sales which are sales where the bank who owns the mortgage will allow the homeowner to sell the house for less than what they owe; other distressed sales include foreclosures and Bank Owned Properties known as REO’s (Real Estate Owned).
- The third sub-market consists of estate sales or non-arm’s length transactions which would be one family member selling their house to another family member below market value.
Market Value of Home – Distressed Property Effect
How does this affect the market value of home? If a market area has a high percentage of short sale and foreclosures then the market area as a whole is affected greatly because an appraiser will have to use one of the distressed sales as a comparable sale because of the fact there isn’t enough arms’ length sales available for comparison. So if short sale and foreclosure sales are saturated in your market than your value will be affected.
Market Value of Home – Determined by Home Appraisal
The “typical home buyer” does not normally purchase short sales or foreclosures. Those properties are typically bought by investors looking to flip them. With that in mind, how could a home owner have the knowledge or the data to conclude if sub-markets would affect their value? The truth is they cannot. This simple example shows the true need for an objective third party appraisal for any home owner looking to sell, refinance, or obtain a reverse mortgage. Most free home value websites run a simple algorithm (fancy word for a math equation) and come up with a value without considering how the properties used in value determination were obtained. An appraiser cannot simply take all the sales within a market area and divide that number by the number of sales. There is expertise involved in weeding out the sales that a typical buyer would not consider for purchase. When determining market value only “competitive” comparable sales should be used in concluding a final fair market value. The typical homeowner is just not equipped to take on this task.
Market Value of Home Today
The job of determining a home’s fair market value has gotten considerably harder since 2008 and the home owner is unfortunately presented with this daunting task. When determining the actual market value of home for the home owner the best solution would be to use a certified appraiser. This fact now more than ever would logically dictate that a pre appraisal be completed before a home owner should consider any financial transaction.