Market value definition in real estate: a guide for exam prep

As you prepare for your licensing exam, one concept you need to master is the market value definition in real estate. It’s crucial in almost every transaction you’ll come across as a real estate professional.

Let’s break down what market value is, how it differs from similar terms, and how you can confidently apply this knowledge in your exam, and eventually in your career.

What is market value in real estate?

The market value in real estate refers to the most probable price a property will bring in a competitive and open market. It’s based on several factors: location, recent sales of similar properties, and overall market conditions.

In other words, the market value of real estate is the fair price that would come from a normal transaction where neither the buyer nor the seller is under pressure to act quickly.

For it to be considered a fair market value, buyers and sellers must be well-informed of current market conditions and the property’s value based on comparable data. There shouldn’t be any unusual factors influencing the sale either. This last part includes special financing or sales concessions that could impact the price.

How to determine market value of real estate

When determining the fair market value of real estate, you rely on multiple factors. The most common way to assess it is through comparable sales, such as looking at similar properties in the same area that have sold recently.

Here’s how to determine market value:

1. Comparable Sales: Compare the property to others that have sold recently with similar features (size, number of rooms, location, etc.).

2. Market Conditions: Is it a buyer’s or seller’s market? The balance of supply and demand can raise or lower property values.

3. Property Characteristics: Unique features like a large yard or a newly remodeled kitchen can increase the market value. On the flip side, issues like structural damage can decrease it.

Remember, market value is an estimated home value or any other real estate property, not an exact figure. It always changes depending on the factors above.

The term can also be confused with others that also refer to estimated values of properties. Let’s compare it first with appraisal and it’s the result: the appraised value.

What does appraisal mean?

An appraisal is a professional assessment of a property’s value, typically conducted by a licensed appraiser. This is a critical step in home-buying because lenders require it to ensure they are not lending more than the property is worth.

The appraiser evaluates several factors, such as comparable sales, property condition, and recent market trends. However, the appraised value might differ from the market value.

Appraised value vs. market value: what’s the difference?

For your exam, knowing the difference between appraised value and market value is essential. The appraised value is what a professional appraiser (a type of real estate professional) determines after evaluating the property (making an appraisal).

While appraisals are important, they aren’t always the same as market value. For example, the appraised value might come in lower or higher than the price the buyer and seller agreed upon. Lenders use appraisals to minimize risk, but buyers and sellers look to market value for a realistic selling or buying price.

The market value is determined by what buyers and sellers agree upon in an open market, which is what they finally pay in the transaction. On the other hand, the appraisal is determined by a real estate professional called an appraiser after evaluating a property.

Market price vs market value in real estate

Many students confuse market price with market value, but they aren’t the same thing. The market price is what someone is willing to pay for a property at any given time. This might be influenced by unique factors, such as buyer competition or urgency.

On the other hand, market value is a more accurate reflection of the property’s worth in normal market conditions. For instance, the market price may rise above the actual market value during a bidding war. Remember the distinction between these two concepts for your exam.

How the real estate market conditions affect market value

The real estate market has a big impact on market value. For example, in a seller’s market with more buyers than homes, the market value rises due to increased competition. In a buyer’s market, where there are more homes than buyers, prices drop, and properties often sell for less than their market value.

Anyways, it is a value that’s always changing. The market value of similar properties today can be quite different from two months ago. Market conditions change with time. In a rising market, the prices can go up, but if some conditions alter, they could decrease.

That’s why it is so important to study the market every time. In the end, the definite market value is exactly what all parties in the transaction agree to sell the property for.

Market value and property characteristics

Property features also affect market value. These are the property’s characteristics, such as gardens, pools, kitchens, accessibility, and the number of rooms. Depending on them, the market value can increase or decrease.

For instance, a home with an ocean view or located in a desirable neighborhood will have a higher value than a comparable property without those features.

Likewise, homes with modern upgrades or more space can fetch a higher price. However, lacking key features, like parking or good security, might decrease the market value.

Comparable sales and fair market value

Assessing recent sales of similar properties is one of the best ways to estimate fair market value, usually for residential properties. This method is called a sales comparison approach.

This approach estimates a property’s value by comparing it to similar properties recently sold in the same area. It considers aspects like the proprieties’ age and features (bedroom amount, square feet, architectural style…).

However, it’s not only assessing the price but the conditions of the sale.

Important factors in determining the best comparable sales:

• Property is in the same area.
• Property has been recently sold.
• It has similar features.
• Both the buyer and seller are well-informed and not rushed.
• The property has been exposed to the open market for a reasonable time.
• No special financing or sales concessions impact the price.
• Both parties acted in their own best interest.

Imagine there’s a recently sold property in the area with similar characteristics to the one being valued. That far, it may look like a good comparable. But when the sale was studied an information appeared. The person who bought the house acted under urgency. They bought the house for a higher price than the current market because they went through a divorce. In that case, the property cannot be a good comparable.

Summing- up the market value definition in real estate

Remember, the market value reflects the house’s true price when sold under normal conditions. It is always an estimate depending on factors like real estate market conditions in a certain area, comparable sales, and property characteristics.

Knowing the market value definition in real estate, how to differentiate it from market price, and explaining the role of appraisals will help you answer exam questions and give you a solid foundation for future transactions.

Study this carefully! Join Lexawise Real Estate Exam Prep, and you’ll be well-prepared to tackle those exam questions and more.