What Does ‘Market Value’ Mean In Real Estate Terms
Have you wondered what does ‘market value’ mean when it comes to real estate?
If you don’t know, there’s nothing to be ashamed about. Real estate is a complicated sector, with wild variances between residential, commercial and industrial properties. Even within those spaces, there can be massive differences.
In this helpful article, we’ll explain everything that you need to know about market value.
Here at Little Fish Real Estate, we believe in sharing our knowledge. As we like to say, knowledge is power, but it’s also money.
By sharing what we know, we hope that you walk away from our content feeling knowledgeable and empowered to make your own decisions about real estate.
So, without further introductions, let’s get into the meat of the article.
What is Market Value?
What is the market value when it comes to real estate? Well, put simply it is the cost amount of a property up for sale, as determined by the current market.
Now, the real estate market is a dynamic, fluid and often volatile thing. Prices can rise and fall and are impacted by various factors.
Put simply, market value is the most probable price that a home should sell for in a competitive and open market. It assumes a fair sale, with the buyer listing an asking price and the seller making offers.
Another way to explain it is that the market value of a house is the price that is negotiated between the seller and buyer, after some time spent on the open market and with some advertising and marketing done either by the seller or by a sales agent.
Now, there’s a bit more to it than what is mentioned above. Market value is also affected by valuation. We’re going to explain what valuation means now.
Valuation – What is It?
A property valuation is a detailed report of a home’s market value. The International Valuation Standards Council defines a property’s value as the estimated sale price.
Now, you’ll notice, if you pay attention to the market, that the final sale price tends to be different from the valuation. This is due to the human factor. It’s impossible to determine how people’s feelings might get in the mix, as well as other motivations.
For instance, a young family may have their hearts set on a property, so they will outbid everyone at auction to obtain the property. When this happens, the sale price can be significantly over the valuation of the property.
Another example is a property developer acquiring a lot suitable for subdivision for more than the valuation. They know they can subdivide and build two or more homes on the lot and see a profit, so they’ll pay above the valuation.
In What Circumstances Should I Get a Property Valuation?
There are a few specific circumstances that might call for a property valuation.
Property valuations can benefit both buyers and sellers. For sellers, a valuation can detail the property’s shortcomings, which the seller might use to undertake renovations to increase the home’s value.
For buyers, a valuation gives a solid indication of the home’s market value, and therefore the buyer knows how much they should offer or bid without going overboard.
Furthermore, the most common reason why property valuations occur is that a home loan lender (typically a bank, although private lenders are becoming more common) requests one as part of the home loan process.
Lenders do this to assess the risk of lending money to mortgagees, as they know if the buyer defaults on their loan.
People might get a property valuation for financial reporting, such as taxation compliance. Or perhaps for divorce and family law mediation and negotiations.
Or for determining the amount paid to homeowners when the government acquires land for infrastructure projects such as roads, train tracks or other big projects.
How is a Property’s Value Determined?
The starting point is usually a direct comparison to similar homes in the area. For instance, if you own a three-bedroom home on a 500 square metre block, the valuer will look at similar-sized homes sold recently and draw a comparison based on the home’s condition and the value of the land.
There are other contributing factors, such as local amenities, any easements present, and the property’s zoning.
In addition, the valuer will inspect other features, such as:
- The overall condition of the home
- The design style
- Any planning restrictions
- The layout of the block and topography
- Ease of access to the home
- Any fittings and fixtures
As you can see, valuing a property is a complex task. The valuer will often visit the home to inspect it.
What Does a Valuation Cost?
The cost will vary from home to home, depending on the above variables. Different companies offer different rates as well. As a rule of thumb, most valuations cost between $350-600 dollars.
Is There a Difference Between a Property Appraisal and a Property Valuation?
Yes, there is. Real estate agents will offer free appraisals, usually as part of their sales tactics, to get you to list your townhouse for sale with them. Unlike valuations, an estate agent’s appraisal has no legal standing. They are helpful as a guide to what a property might sell for, but they are not a proper valuation.
However, a qualified and licensed valuer provides a service for a fee and holds legal responsibility for their report – and furthermore, their valuation reports are more comprehensive.
Can I Increase My House’s Market Value?
Yes, there are many things you can do to lift the value of your property.
Now, you’re stuck with the land you purchased, so there’s nothing you can do there.
That said, you can do whatever you want to your home. You could renovate the entire house or just a single room. In addition, you may want to extend or build another storey, depending on your local council’s planning processes and restrictions.
There’s another thing to do to ensure that your house looks impressive. With a neat front and back yard, a fresh lick of paint and an overall spruce up, you can increase the “curb appeal”, which will increase the value.
Don’t underestimate your bathroom and kitchen. These are the most renovated rooms, as people are particular about their cooking and bathing spaces. If it’s outdated, consider a makeover to increase the appeal.
Another element that can increase the value of your property is a garage or carport. People who drive appreciate having their car protected from the elements, so if your house lacks this, consider installing one.
Hot Markets Adjust Value Rapidly
A hot market is a market where property values rise so quickly that sales from three months prior are no longer a reliable yardstick of current values.
A hot market means that a valuation you commissioned a few months ago is probably no longer accurate. You should either commission a new valuation or increase your asking price based on the sales data of similar properties.
As you are starting to see when thinking about what market value means in real estate there are a lot of moving parts that need to be considered.
Let’s roll on.
Common Pitfalls
There are some common pitfalls when you are buying or selling real estate. We’ll list them and also detail how to avoid them.
Using For Sale Properties as a Comparison
Many people look at properties up for sale and use the sales data to determine their perceived value or reserve price.
This is not an accurate indication of value because the houses are up for sale. Who knows what they will sell for? Some may go for hundreds of thousands of dollars over their reserve, and some may sit up for sale for months.
Instead, rely on sales data.
Relying on Sales Agents
Now, a good sales agent is worth their weight in gold, as either a buyer or a seller. However, they will only push the homes on their books, as they need to make the sales. It’s their job, after all, and they want their commission.
Remember the difference between an agent’s appraisal and a legitimate property valuation that we outlined above.
Comparing Wildly Varying Homes
Some people will compare sold properties with their properties when there is no comparison. For instance, two-bedroom unit sales are not comparable to selling a four-bedroom stand-alone home. Try to compare apples with apples.
Emotional Attachment
When people put their homes up for sale, they often have a strong emotional connection to the home. They’ve raised a family there, lived there for thirty years, or have otherwise built a life in the property.
This often results in sellers asking too much for a property, as they believe it is worth more than it is.
On the other hand, buyers can become emotionally invested in a home because it suits their needs. It either has the required number of bedrooms or the extras like double garages, bungalows, granny flats or other features.
This can mean buyers pay over the home’s actual value because they are convinced it is their dream home.
Can you see how both factors can skew a home’s actual value? The funny thing is that the market determines the value, a house sold for more than its valued price determines the value of other properties. It’s a tricky thing.
Understanding what market value means in real estate terms, on more than just a surface level takes time and effort to understand.
Summing Up
I’ve shared what market value means in real estate in this informative article. I’ve discussed how valuations occur and the difference between an appraisal and a proper valuation.
I have also shared some simple tips that may help you increase your home’s value.
By now, you’re a true expert on property values, which should aid you as either a buyer or a seller.
Keep these tips in mind when townhouse hunting or selling.
