I often get asked what I think the market value is of a home for sale in Carmel, Pebble Beach or elsewhere on the Monterey Peninsula. If the person asking the question is a buyer, the next question is often if I think it can be purchased for less. Sometimes the answer is “yes,” sometimes “no,” and sometimes “let me see what I can find out.” If it does sell for less, was I wrong about my estimate of the property’s market value.
Sometimes, yes. But, often there are other factors at play.
Market Value is the price that a property could bring in an open market with both a willing buyer and seller. With neither the buyer or the seller facing undue pressure from outside factors. And, with the buyer and seller having perfect market information (only an economist could envision such a thing) and no barriers to entry or exit from the market. As you will remember from econ class, real estate is a beautiful example of an imperfect market.
Given its imperfections a property’s market price (the price at which the property actually sold) may be markedly different from its market value.
For example, a home may appraise for $950,000 but the seller is in the midst of a divorce or may have lost his or her job. When presented with an offer of $875,000 with a relatively quick close the seller may accept, regardless of the market value. Or more likely these days, a seller may be faced with growing monthly payments and declining income and a sense that the clock is running out on their ability to escape unscathed.
It can, although not often lately, work the other direction as well. There could be a buyer who is undertaking a 1031 exchange and has a limited period in which to purchase a property. She may opt to may a higher market price because the property she desires meets her needs, can be closed within the time limits, and the tax benefits of completing the exchange are sufficiently large to justify paying over market value to close the deal.
How Does Market Price impact Future Market Values?
Each time a property sells it becomes a comparable for the future sale of a similar property. This is where market price has its impact (beyond the impact it had on the seller and buyer of the specific property.)
For example, I know of a bank owned property that was listed at about $1,125,000 even though all indications were that its market value was under $1,000,000. The seller received highest and best offers from three different agents, all at $950,000. The seller declined those offers and remained on the market for two months before contemplating a price change. By the time the seller reached a list price of $950,000 those original buyers were long gone and no new buyers considered the property to be worth $950,000 given the several months it had been on the market.
Remember, to the market of buyers who originally thought the property was exciting at $950,000 it appeared that the bank had received no offers. Perfect information? Not at all. Those prospective buyers were shying away from the property figuring there must be something wrong with it. After all, it was bank owned and the banks wanted to get rid of inventory fast…so the fact that it was still on the market after so many weeks could only mean it was worth less than they thought it was worth.
Time passed and the property ultimately sold in the mid $800,000 range.
The buyer apparently got a great deal. By the time he came along he was able to buy a property for a $100,000 less than the market said it was worth a few months earlier. Buyers ultimately determine a properties value, and this property had 3 buyers all at the same purchase price.
Unfortunately the ultimate market price had a negative impact on all the neighboring properties market values. Over the coming months a future seller, buyer, appraiser or other Realtor would have no way of knowing what happened during the marketing of the property and would ultimately consider the $850,000 sale price as a good indication of market value.