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What is Market Value, Or Who Determines The Sale Price of a Home?

March 6, 2007

Pricing, Pricing, Pricing.... It's a mad, mad world, isn't it? No matter how many times we Realtors explain that pricing for real estate is just as it is for anything else, i.e. supply v. demand, buyers and sellers seem to have their own ideas!

Ultimate Rule Numero Uno: 1. The buyer sets the price.

What this means and what it does NOT mean: It means... This rule means that no matter what the seller wants or what the comparable sales say, ultimately, the buyer who is willing to purchase the property at the highest price sets the market value. In other words, market value is what any one buyer will pay for a particular property at a particular moment in time.

For example, there is a condominium listed for $599,000. Activity is sluggish and after 6 weeks, a buyer makes an offer of $590,000 and the seller accepts. In this case, the condo's market value is now $590,000. Or, the same condominium goes on the market for $599,000 and activity is brisk.

In fact, the open houses are swamped with people and listing agent gives out 10 disclosure packages to interested parties. She sets an offer date, or a date in which all offers will be reviewed. Five Realtors bring offers on behalf of their clients. The best offer, in both price and terms, is for $650,000. The seller accepts. In this case, what is the market value of the condo? It is $650,000. It does not matter that it couldv'e sold for $590,000. All that matters is that one buyer was willing and able to pay $650,000 for it.

It does not mean... To say that the buyer sets the market value of a condo does not mean that any buyer can set any price he wishes. In example 2 above, if you felt that the market value was the asking price of $599,000, you would not have set the price because at least 3 of the other 5 buyers offered more money. Sure, in your mind, the market value was $599,000 but in reality, the value was what the market could bear: $650,000.

This system is not unlike the stock market. A stock's value is based on what investors will pay for it. Sure, the price has something to do with P/E, ratings, the economy, etc but at the day's end, it trades for what buyers and sellers will allow.

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