In real estate, the term ‘market value’ refers to the most probable price a property will sell for in an open market. Market values are determined by real estate appraisal professionals. Note, however, that the price at which a house actually sells—called the ‘market price’—may not always represent that property’s market value. Sellers under duress because of impending foreclosures, for example, may agree to sell their homes below their market values. That said, under regular circumstances when a property is exposed to normal market conditions, it will probably sell within its market value.
You might be wondering: Why is it that homes usually sell close to market value when participants—sellers, agents, and buyers—don’t make adjustments, verify data, or analyze statistics like a real estate appraisal company does? Experts agree that the market typically gets the price right because of three reasons:
1. Before getting into the market, buyers and sellers usually contact experienced agents who give them expert advice. Most real estate agents have experience in setting the ‘right’ prices based on the selling price of comparable properties. Aside from helping set strategic offer prices and list prices, a good real estate agent can also point out trends and guide buyers and sellers in making decisions.
2. Most buyers determine what their price range is and which locations they are interested in before searching for properties. This allows them to look only at homes that are in their desired neighborhood and price range. When buyers focus on a particular area and price range, they can start to accurately determine what the good deals are. This process eventually leads them to the right price—which is close to market value.
3. Sellers usually adjust to market value—eventually. They quickly realize that pricing their property too high means low showings and zero offers. Meanwhile, a home that is too cheap often receives multiple offers and ends up selling for close to market value, if not higher.
Despite the fact that buyers and sellers typically get the value right, banks still require real estate appraisals in a purchase. This is because while buyers ‘usually’ buy at market value, sometimes they don’t. Also, some properties offer unique features that buyers fall in love with, despite the price. Non-market factors can also influence pricing. For this reason, banks still rely on independent opinions from real estate appraisal companies to protect their interests in the loans they give out. This makes good financial sense; after all, appraisal costs are very low relative to the costs of approving a bad loan.