Determining the worth of your property when it hits the market isn't just about its assessed or appraised value. Market value is the actual price buyers are willing to pay, which might differ from official evaluations.

Simply put, what the government, banks, or appraisers think your home is worth might not match what buyers are willing to pay. Confusing, right? Let's find out what market value truly means and how it influences the buying and selling process.

 

What Is Market Value?

Market value is the true worth of your property when it's up for sale in the open market. It's determined by potential buyers and represents the price they're willing to pay to buy your home.

Unlike the assessed or appraised value, market value of a property is based on what buyers perceive as the actual value of your property. It's what they believe your home is worth and what they're ready to pay for it.

In other words, the government might estimate a certain value for your home, and the bank might have a different valuation. At the same time, potential buyers could see it as worth even more or less than the assessed or appraised value. If this sounds a bit confusing, you're not alone—dealing with these different perspectives on property value can be overwhelming.

 

Market Value Scenario

Let's say Alex plans to sell their property for $300,000. However, the potential buyer, Taylor, already has a pre-approval indicating they can afford only $250,000. In such cases, Taylor might offer the lower amount or land somewhere in between if there's competition.

Various factors affect determining a fair market value for a home. Yet, as a rule of thumb, the home's market value tends to be higher in a competitive market. When you're in the process of buying a home, it's crucial to have a clear idea of what you can afford.

One practical approach is to prioritize getting preapproved as your initial step. Armed with a pre-approval letter, you can narrow your search to properties within your financial reach. This way, when you stumble upon your ideal home, you can confidently make an offer that considers your approval amount, the property's market value, and its appraised value. This strategic move can prevent you from overpaying for your new home.

 

Market Value Advice For Sellers

Selling your home involves figuring out its market value. It's up to you to decide what you believe your home is worth, but it's a good idea to hold off on setting a price until you get an expert's opinion on its appraised value. Determining a home's value involves considering various factors.

Remember, different people might have different views on what your home is worth. For example, one person might think your asking price is perfect, while someone else might suggest a lower price. Ultimately, it's the buyers in your area who determine a fair value by deciding what they're willing to pay. Their choices reflect the actual market value of a property.

 

Appraised Value Vs. Market Value

When figuring out how much a property is worth, there are two main things to consider: appraised value and market value. The appraised value is determined by a real estate expert at a specific moment in time. This value is like a snapshot of what the property is estimated to be worth. On the other hand, market value is more flexible. It's influenced by what buyers are willing to pay based on their opinions about the property's worth and what they can afford.

Your home's appraised value can change over time, often because of changes in the overall housing market. The market value is also affected by economic factors and the condition of your home. How old it is and the local market conditions all play a role in determining what someone might be willing to pay for it.

 

What Is Comparable Sales?

Comparable sales, often called the "market data" approach, is the usual method used to determine the market value of a property. This method involves looking at the recent sales of properties like yours to help make a fair judgment.

When examining recently sold homes that closely resemble yours in terms of size, rooms, amenities, and other factors, a higher selling price tends to indicate a more positive appraised value for your property. It's essential to note that the appraised value might differ significantly from the actual sale price in the market.

By analyzing the recent sales of properties akin to yours, this approach provides a practical way to gauge the potential value of your property. Reviewing these comparable sales helps estimate a fair and competitive market value for your home, considering its specifics and similarities with recently sold properties. This method considers various aspects, such as size, room count, and features, to arrive at a more informed judgment regarding your property's value in the current market landscape.

Remember, though, the appraised value derived from this method might not necessarily align with the exact sale price your property could fetch in the market.

 

What Is IRS Publication 561?

IRS Publication 561 serves as the main guidebook for determining the fair market value of various properties according to the tax laws. It covers multiple items like cars, boats, collections, used clothing, securities, patents, annuities, etc. However, what's missing is a specific section dedicated to establishing the market value of real estate.

This publication emphasizes the importance of a thorough appraisal by a certified appraiser to ensure accurate valuation. It highlights three approved methods for valuation:

• Comparable Sales Approach

The comparable sales approach looks at a property and checks out similar ones sold recently. It considers the property's size, number of bedrooms, and how specific features impact its value.

• Capitalization of Income Approach

The income capitalization method values an investment by looking at the future benefits it can bring. It figures out the property's value by considering how much rent it could make in the market and its potential resale value.

• Replacement Cost New Value Approach

The replacement cost new value approach figures out how much it would cost to build the same property today, using today's materials, design, and standards.

 

The Bottom Line

In the end, when selling a house, the price usually gets decided through negotiations between the buyer and seller. They might use different methods to decide on a fair value, but ultimately, they agree on some give-and-take.