Definition of Market Value in Real Estate
A Lesson on Determining Market Value
Written By: Mariko Baerg, REALTOR of Bridgewell Real Estate Group
If you’re looking for a realtor to help you determine market value for a home that you’re considering buying or selling, call me today!
If you’ve made your way to this blog it’s because you want to learn about the real estate market and what the definition of market value in real estate really is – so get ready for a crash course.
What seems like forever ago I went to University and got a Bachelor of Economics [yes I like econ, and yes I know I’m pretty much the only one]. While much of what I learned does not help me in many scenarios, one place where my education is relevant is the real estate market.
Remember basic supply and demand? A market is where buyers and sellers meet to exchange something [in this case, a house], and the relationship between supply and demand affect prices. More specifically:
- Increased demand increases prices
- Decreased demand decreases prices
- Increased supply decreases prices
- Decreased supply increases prices
To sum up the current market: Increased demand and decreased supply together results in ridiculously high real estate prices.
I regularly come across buyers and sellers who think that whatever price they need to buy or sell for is the market value, and unfortunately those buyers and sellers are the ones that never end up actually succeeding in the real estate market. If you’re willing to learn about the market, then keep reading the important lessons to learn about the real estate market and market value:
Lesson #1: You Don’t Determine Market Value
*Cue above picture* “What do you mean I don’t determine market value? Well, the market dictates how much the house is worth. NOT the seller. NOT the buyer. NOT the real estate agent. AND CERTAINLY NOT E-Value BC/BC Assessment. True Market value is the point at which a seller and buyer mutually agree to exchange a house for a certain amount of money.
The simple truth is that houses that are overpriced do not sell, because the market is not willing to pay that price today. Houses that are underpriced get multiple offers, because the market is more than willing to pay that price and more today.
Let me re-iterate: Houses that are overpriced don’t sell. Houses that are underpriced get multiple offers. That’s the market doing its thing.
Scenario #1: Multiple Offers
Here’s a scenario that we see often in today’s condo market when a home receives multiple offers:
- Condo is priced at $649,000 and the sellers set an offer date the following Monday at 6pm in hopes of obtaining multiple offers.
- Evalue BC says it’s appraised at $605,000.
- The seller receives 7 offers.
- One or two of those offers is usually around listing price.
- Three or four offers are in the middle of the pack and offer over the asking price, but within moderation – say around $675,000
- One or two offers REALLY want the place and have lost out on a couple of offers before. They offer a ton of money and are willing to pay $700,000.
- After all negotiations the condo sells for $710,000 subject free.
So what is the market doing here? Low supply and high demand. While most buyers felt that the market value of the property was $675,000, the laws of the market drove that price higher and the Seller was lucky to find a Buyer who was willing to pay more. So is the market value $675,000 or $710,000?
Answer: The market value is $710,000.
A couple of days later the appraiser from the bank comes through to appraise the property. They know that E-value BC says $605,000, and they know that someone was willing to pay $710,000. The appraisal goes through at $710,000 with no problems – WHY? Because the appraiser understands that the market value is the price at which the highest offer/buyer is willing to pay.
What can we learn from this? The market value was not determined by the seller, it was not determined by what the majority of buyers thought it was worth, it was not determined by BC assessment, and it wasn’t determined by the realtor. The property sold for the point at which a seller and buyer mutually agree to exchange a house – which in this case was $710,000.
So, while market value largely relies on the precedent that has already been set, therefore other RECENT sold comparable properties, if someone is willing to justify paying more, then that is the new market value. The unfortunate news for other buyers is that in a rising market if you aren’t willing to pay the most today, you’ll likely have to learn the hard way and pay more down the road.
Scenario #2: The Overpriced Home
Here’s another common scenario:
- A house is listed for $1,799,000
- A few days later, the Seller receives an offer for $1,730,000 and turns it down.
- Two weeks later they receive another offer – this time at $1,725,000.
- A month later another offer is received at $1,735,000.
If 3 Buyers are making offers around the same number, like it or not, that’s likely how much that house is worth. Sellers who are motivated to sell will listen to what the Buyers are saying and eventually accept a lower price, while some Sellers will decide to take their house off the market and wait for prices to increase.
Here’s what the market did: there was low demand for the house at $1,799,000 so Buyers refused to meet the Seller at their asking price. Only when the price is lowered to what the Buyers are prepared to pay, will this house sell.
Market Value Lesson #2: There’s No Such Thing As “Getting a Deal” in Vancouver
I often hear, “Mariko, find me a deal in Vancouver and I’ll buy it.” Sometimes I would like to laugh and walk away but I refrain and opt for the nice way of explaining things.
In short: There’s no such thing as buying “below market value” in a hot market like Vancouver’s.
Problem #1… If the seller has listed the property for below market value, then they’ve done this intentionally knowing that the market will drive up the price higher via bidding war. Active buyers and their agents will realize the house is underpriced, and as a result of that the house will sell for a higher price. Listing price is just a strategy to invoke a higher demand, and listing price and market value are two completely different things.
Problem #2…What a house sells at IS the market value. If nobody wants to pay $950,000 for a house listed at $950,000, than that’s not market value. If the only offer the Sellers get is for $899,000 and they decide to accept that offer, than that’s market value. Just because it didn’t meet the Sellers’ expectations doesn’t mean it was a bargain or a deal or below market value – it’s just the value that the market was prepared to pay for it.
Problem #3… Just because you buy a home below listing price doesn’t mean you got a deal on it. If a house was listed for $975,000 and all the previous offers that the seller rejected came in at $925,000 but you were willing to pay $950,000 then guess what – you probably overpaid for the house. But guess what, what a house sells for IS the market value – so whatever you buy the house that you think you got a “deal” on IS the market value. No deal because they don’t exist. [“The limit does not exist!” – shameless Mean Girls reference]
All in all, the real estate market is a funny thing. However, the most important thing to understand is that whether we are a buyer, seller, or real estate agent – we don’t control the market. The market is smarter than us, so learn from it! We hope that this blog provided you with the true definition of market value in real estate. If you’re currently an unrepresented buyer looking for some guidance in the real estate market, give us a call at 604-765-0376. Prefer text? 604-319-0200. or email email@example.com to set up an appointment.
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