Fair Market Value
February 4, 2009
"Fair Market Value" is considered a legal term and in law and economics is based on "market value". The general definition is:
It is the most probable price at which a good or service will exchange, expressed in terms of cash or equivalent, in a free market assuming:
A knowledgeable and willing seller unencumbered by undue pressure to sell and acting in his/her own best interest;
A knowledgeable and willing buyer unencumbered by undue pressure to buy acting in his/her own best interest;
A reasonable time for exposure in a free and open market.
In the present real estate market, when a seller decides to sell, a real estate agent will prepare a "market analysis". The agent uses past sales of comparable properties and gives an opinion of the market value of the property. (The operative word is "opinion".) Determining market value is not a science, it is based on an educated opinion.
When a buyer and seller have negotiated a selling price, and when the buyer will be obtaining a loan in order to complete the transaction, the lender sends an appraiser to do an appraisal. The appraisal is also based on comparable sales and is also not a science but an opinion.
In the present real estate sales environment where in half of the transactions, the seller is a bank, the question arises as to whether these are free an open market transactions. However, these sales become the comparables used by agents and appraisers to determine market value.
What has made transactions fall apart can be the determination by the appraiser that the purchase price was greater than the present market value. Since it is a declining market, the appraiser makes a time adjustment and sales that are more than a month old, may have 2%-3% a month deducted from a previous selling price.
I raise the question: How can the market stabilize, if the negotiated price is then reduced by the appraisal?
At some point, buyers may start to pay over the appraisal and the comparable selling prices will adjust to a new price point.
"Fair Market Value" is considered a legal term and in law and economics is based on "market value". The general definition is:
It is the most probable price at which a good or service will exchange, expressed in terms of cash or equivalent, in a free market assuming:
A knowledgeable and willing seller unencumbered by undue pressure to sell and acting in his/her own best interest;
A knowledgeable and willing buyer unencumbered by undue pressure to buy acting in his/her own best interest;
A reasonable time for exposure in a free and open market.
In the present real estate market, when a seller decides to sell, a real estate agent will prepare a "market analysis". The agent uses past sales of comparable properties and gives an opinion of the market value of the property. (The operative word is "opinion".) Determining market value is not a science, it is based on an educated opinion.
When a buyer and seller have negotiated a selling price, and when the buyer will be obtaining a loan in order to complete the transaction, the lender sends an appraiser to do an appraisal. The appraisal is also based on comparable sales and is also not a science but an opinion.
In the present real estate sales environment where in half of the transactions, the seller is a bank, the question arises as to whether these are free an open market transactions. However, these sales become the comparables used by agents and appraisers to determine market value.
What has made transactions fall apart can be the determination by the appraiser that the purchase price was greater than the present market value. Since it is a declining market, the appraiser makes a time adjustment and sales that are more than a month old, may have 2%-3% a month deducted from a previous selling price.
I raise the question: How can the market stabilize, if the negotiated price is then reduced by the appraisal?
At some point, buyers may start to pay over the appraisal and the comparable selling prices will adjust to a new price point.
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