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Two types of real estate value

Bottomline Real Estate

Often the general public is confused by real estate brokers and their agents and appraisers because they often mean different things by seemingly similar words. “Market value” is a case in point.

When a real estate agent talks to a homeowner about market value, they are generally talking about what price to put on the property for listing purposes. That is, the “asking price.” This asking price usually has some “fudge factor” in it. I most often see around 5% or so. Any fudge past that would likely take the property out of the competition of home buyer prospects.

The real estate agent or broker will usually share the homeowner data compiled in a “competitive marketing analysis” (CMA). Some call this a “broker’s opinion,” but regardless of the name, it’s the same thing. That is, it’s the broker’s or agent’s attempt to share information on recently sold and physically similar properties in the neighborhood of the subject property. Additionally, the agent will likely give information about “competitive listings,” i.e., properties similar to the subject currently for sale but as of yet unsold.

Both areas are important because the sold properties give the agent and homeowner a perspective as to what the recent sales history is, while the competitive listings let the homeowner know what the competition will be should they list their home for sale. Of course, since no two properties are exactly alike, some “give and take” has to be applied to the data. For example, a similar house may have sold recently, but it had a double carport while the subject house has a double garage. Most anyone would agree that the house with the double garage, all other things being equal, would be expected to bring more than the one with the double carport. A knowledgeable agent will take this difference into consideration. Often the sales prices are broken down on a “per sq. ft.” basis for comparison purposes. Buyers and sellers both think this way and understand using this unit of comparison.

No savvy real estate agent is going to deliberately over-price a property. On the other hand, they should attempt to get the highest price the market appears to support. Then if there’s a bit of a fudge factor, so be it. Ultimately, the buyers in the marketplace decide what the property will sell for, assuming it is exposed for sale for a normal period of time and is actively marketed by the Realtor. Brokers and agents well know that the cost of showing an over-priced listing is the same as one that has a chance of selling. The ads cost the same, too.

Appraisers on the other hand have somewhat a different working definition of “market value.” By definition, market value is “the most probable sales price” a property can expect to bring if exposed on the market for a reasonable period of time. In other words, there is no fudge factor in an appraiser’s working definition of market value.

It’s because of these differing definitions that the homeowner often ends up somewhat confused. We see this often in the case of a relocation appraisal, where the homeowner’s company is going to buy the transferred employee’s home. Normally the relocation company will pay the average of two appraised value estimates, providing they’re within a range. This normally gives the homeowner a fair price for the home as no relocation company that I know of asks the appraiser to “low ball” the appraisal. And even if they did, the appraiser should ignore such a request and render their honest opinion as to current market value. In the relocation process, the homeowner may have the house already listed for sale when the relocation appraisers come to appraise the property. The listed price was likely the price the homeowner and Realtor agreed to. It may well have the fudge factor. At a minimum it will be optimistically priced, since it’s the broker’s responsibility to get as high a price as possible for the seller. Still, it’s to no one’s advantage to over-price the property so that it won’t sell.

The relocation appraiser’s job involves an impartial, unbiased opinion of the current value. In other words, the most probable sales price. The relocation appraiser isn’t attempting to secure a listing and, unlike the agent, will be paid regardless of whether the property sells or not. For that reason, the appraiser’s estimate of value will not include any fudge. It will be an unbiased opinion as to the most probable price the property will bring.

The bottom line — when it comes to the term “market value,” be aware that there are different “flavors” of this word, depending on who’s using it.

Jerry G. Brewer, SRA, is a

About Chris Elkins

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