The difference between market price and market value in real estate
In real estate, many agents suggest that it all comes down to price. Is it true that a property sells just because of price? What about the value component?
Well, we all can agree that there needs to be an exchange of goods in order for a sale to occur. However, the buyer and seller might not rate value equally. When I market a client’s property, I determine a market price without viewing the property and the probability of that property being sold in 30, 60 or 90 days based on comparables and market data. Then I determine a market value once viewing and assessing all the benefits, the condition of the property and external market data.
Let’s examine the differences between market price and market value and how they can influence each other.
Market price is what a willing, ready and bank-qualified buyer will pay for a property and what the seller will accept for it. The transaction that takes place determines the market price, which will then influence the market value of future sales. Price is determined by local supply and demand, the property’s condition and what other similar properties have sold for without adding in the value component.
Market value is an opinion of what a property would sell for in a competitive market based on the features and benefits of that property (the value), the overall real estate market, supply and demand, and what other similar properties have sold for in the same condition.
The major difference between market value and market price is that the market value, in the eyes of the seller, might be much more than what a buyer will pay for the property or it’s true market price. Value can create demand, which can influence price. But, without the demand function, value alone cannot influence price. As supply increases and demand decreases, price goes down, and value is not influential. As supply decreases and demand increases, the price will rise, and value will influence price. Market value and market price can be equal in a balanced market.
However, buyers and sellers can view value differently. A seller might feel that their in-ground pool is a benefit, but the buyer could see it as a negative and place less value on the property. Or the seller could feel the new roof they put on the house has great value; however, the buyer places no value on this because they expect the property to have a roof in good condition. Or a builder might feel he has superior quality and demand a higher price, but the buyer places less value on quality and more value on the lot, neighborhood and floor plan of the property.
Value is not always about bricks and mortar. Some buyers might pay more for a property based on personal value-added items. For example, Buyer A, who does not drive, values a property higher than Buyer B because the property is next to a bus line. Or the property could be close to a school or close to a doctor’s office for someone who has children or a medical condition.
The question is, “How much is that worth to a buyer?” as there is always a limit to what a buyer will pay and what the property will be appraised for by a bank. Value is truly in the eye of the beholder. Some buyers might see value in the property but might not pay more if there is no demand. In most cases market price will trump market value in a buyer’s market.
Is price the driving factor in selling a property, and can price alone beat all objections a buyer has about a property?
I believe that in a buyer’s market, or even a neutral market, price alone can beat most objections. In a buyer’s market, where demand is lower, buyers will wait for the right deal.
The economic downturn in the past has made buyers more cautious about their money and how they spend it. Buyers are more cautious, and they are taking more time to decide. I have found that price is a major motivator. If a property is in need of repairs, a homeowner can reduce the price to attract those buyers who see the value in the property.
Price levels the playing field. I work with many buyers who might dislike a particular feature of a property but will overlook that “negative” feature if the price is right. Think about it, every property eventually sells for a market price. Even those properties with power lines behind them or are next to train tracks, close to a cemetery, that are haunted, that have a swamp in the backyard or those of poorer construction eventually all sell.
Some would argue that such factors as sales techniques, marketing, increased exposure and staging can add more value and increase demand, which will cause a higher market price.
A house does not sell itself — or does it?
This is an interesting argument, as most products need a push to sell — a push from a branding, sales and marketing standpoint. However, in real estate most consumers looking in a particular area and price range know which properties are for sale and can determine price and value quickly with the help of the Internet.
In my opinion, marketing is a function of price. Great marketing with the right message will drive more traffic to the property. But when the buyers can touch and feel the property, the property does have to “sell itself” to some degree. Real estate agents, marketing and even home staging can help bring those buyers to the property and entice interest; however, in the end the home has to be within a buyer’s budget and provide value, and the home does have to “sell itself.”
So, is price the only reason that homes sell? You decide. I feel that price combined with effective marketing is the largest motivator to get a home sold in any market, especially in a buyer’s market. When it is a seller’s market, you can strategically price a home to get over asking price. But, in the end a buyer will pay only what it is worth and the buyer has the checkbook.
Author: Robert Mctague