Understanding the Difference Between Price and Market Value in Real Estate

When selling a real estate property, it is crucial to understand the difference between the price you set and the market value. These two concepts play a significant role in the transaction process and can greatly impact the outcome of the sale.

Setting the Price: A Personal Decision

The price of a property is essentially the amount that the owner determines it is worth and decides to put on the market. This price can be influenced by various factors such as the owner's personal desires, the initial market conditions, or even emotional attachments to the property.

However, it is not uncommon for an owner to set the price too high or too low. Setting the price too high might scare away potential buyers, leading to a slower sale or even no sale at all. On the other hand, setting it too low could result in a quick sale but at a lower value than it could have fetched.

Market Value: What People Are Willing to Pay

The market value, on the other hand, is the price that a property is worth based on what the market is willing to pay for it. This is a more objective measure that factors in various external and internal conditions, including local economic conditions, demand, and supply.

A Practical Example

Consider a scenario where an owner decides to sell his property. A realtor advises the owner to market the property for a price of $400,000. This is the strategic price set to maximize the chances of a successful sale, but it may not necessarily reflect the market value.

The house, being older, is assessed by the tax assessor at $260,000. This assessment, while important, is based on the property's tax valuation rather than its market value. When the property eventually sells for $325,000, this figure represents the actual market value. This is the price that a buyer was willing to spend for the property.

Impact of External Factors

The market value of a real estate property is heavily influenced by external factors such as the state of the general economy. A strong economy may boost demand, leading to higher market values, while a weak economy might decrease demand and lower values.

Other external factors include:

Local job markets and employment figures Interest rates and their impact on borrowing costs Natural and economic events that affect the local community

It is also important to consider internal factors such as the condition of the property, its location, and any improvements or renovations that have been made.

Reassessments and Market Value Fluctuations

After a property has been sold at a certain price, the tax assessor may reassess the property based on the sale price. This new assessment may or may not reflect the current market value, depending on external economic conditions at the time of the reassessment.

For example, if the property that sold for $325,000 is reassessed and the tax assessor sets the new value at $325,000, it does not necessarily mean that the market value has stabilized. Other properties in the area could have seen changes in their values due to economic fluctuations or changes in the local real estate market.

Conclusion

In summary, while the price is a subjective setting made by the owner, the market value is a reflection of objective conditions in the real estate market. Understanding the difference between these two concepts is crucial for both property owners and buyers in the real estate market. Properly assessing market value and setting the price appropriately can significantly impact the successful sale of a property and the overall financial outcome.