What is market price and how does it differ from market value? These two terms are used a lot in real estate, but not everyone understands what they mean. If you want to be a successful real estate investor, you need to understand the difference between market price and market value. Essentially, market price is what someone is willing to pay for a property. Market value, on the other hand, indicates what a property is actually worth. In this article, we will go over everything you need to know about market price, market value, and the factors that affect them.
Market Value
Market value is the replacement cost of an asset. It can be used to determine how much a property would sell if it were new. It is commonly used in real estate investment transactions to determine a price that can be used for financing purposes and the amount vendors are willing to accept.
A property’s market price equals what buyers are willing to pay. A property’s market value is often the same as what the property is worth on an open market. However, market values and prices often reflect other factors, such as the costs of selling a home or dealing with other transactions, and therefore differ from the nominal price someone might bid or offer at a given time.
Three things can be used to determine an investment property’s worth or value: the housing market, property features, and benefits.
How the Housing Market Affects Market Value
Real estate prices are highly affected by the supply and demand in that area. For example, in a buyers market, demand for houses is low, but there are many homes on the market. This drives prices down and results in a better deal for the buyer. Conversely, there is a low supply of houses in a seller’s market and a high demand, which allows sellers to raise the price on their home and profit more from the sale. As a real estate investor, you should understand the markets in your area to determine when you should sell and buy.
How Property Features Affect Market Value
What are property features? These are things like decks and patios that increase the market value of a home. Understanding what features can raise the market value of a home is important for investors, especially if you plan to do any projects on the home. Understand that features may also lower the value of a home, so it’s important to do your research.
How Benefits of a Home Affect Market Value
Benefits are important to remember when pricing things like apartments. The top story of your apartment building may have a higher market value because of its security and views. On the other hand, ground-level apartments will have a lower market value because they are less secure and have less privacy.
Market price
A home’s market price includes the costs of selling a home, such as broker commissions and closing costs.It is often presented as a percentage increase or decrease from a previous price. However, it should be noted that this term is often confused with market value. Market value is the price that a property would sell for on the open market, factoring in a realistic amount for expenses such as brokers’ fees. Market price is the amount an individual is willing to pay for a property. It factors in other conditions, such as financing ability and trade-off allowances, but does not include real estate agent’s commissions and closing costs (which vary from state to state).
Tools to Help You Determine Market Value and Market Price
Market Value Appraiser
The National Association of Realtors operates this online tool. It will provide you with an estimate of the current market value of a property. However, as this is only an estimate, it’s best to check it against other estimates you may have obtained elsewhere.
Comparable Sales
Another way you can understand the market value of a property is to look at other comparable sold properties in the same area. They should be the same type of property and around the same size. Make sure the sales are within the past three months and are in the same general area as the property you are looking to value.
Market Price Appraiser
This online tool is operated by the U.S. Census Bureau and offers estimated values of homes sold in your area based on recent transactions and comparables in your area.
Things to Consider
As market price equals what buyers are willing to pay, the actual price of a particular property can constantly vary. For example, the market price of your home can be quite different from the amount you paid for it if you bought it several years ago when interest rates were higher or if you live in an area with high real estate values. If you do not fully understand the market value of your house, you risk underselling it for way less than it is worth. For investors, this can also work in your favor and allow you to buy homes that are priced under their market value.
Essentially, market price is what your investment property is being sold for, and market value is what it is worth. Make sure to use your tools and research to ensure you get a fair price and make a profit.
For more information on real estate investing, make sure to check out our other articles.
As an enthusiast and expert in real estate, I've delved deeply into the nuances of market dynamics, property valuation, and the intricacies of real estate investing. My understanding extends beyond the surface, grounded in practical experience and a comprehensive grasp of the concepts involved.
Now, let's dissect the article on market price and market value:
Market Price vs. Market Value:
Market Value:
- Definition: Market value is intricately tied to the replacement cost of an asset, especially in real estate. It represents what a property would sell for if it were new.
- Application: Often used in real estate transactions for financing purposes and determining the amount vendors are willing to accept.
- Factors Influencing Value: Determined by the housing market conditions, property features, and the benefits associated with the property.
How the Housing Market Affects Market Value:
- Supply and Demand: Explains the impact of supply and demand on real estate prices. In a buyer's market, prices decrease due to low demand, while in a seller's market, prices increase due to high demand and low supply.
How Property Features Affect Market Value:
- Features Influence: Describes how specific features, like decks and patios, can raise the market value of a home. Emphasizes the importance of research since features can also lower a home's value.
How Benefits of a Home Affect Market Value:
- Benefits Consideration: Highlights the importance of benefits, such as security and views, in pricing properties like apartments. The article draws attention to how different factors can either raise or lower the market value.
Market Price:
- Definition: Market price is what someone is willing to pay for a property. It includes costs like broker commissions and closing costs.
- Factors Considered: Takes into account financing ability, trade-off allowances, and other conditions but excludes real estate agent’s commissions and closing costs.
Tools to Determine Market Value and Market Price:
- Market Value Appraiser (National Association of Realtors): An online tool providing estimates of current market values. Advises cross-referencing with other estimates.
- Comparable Sales: Suggests looking at recently sold properties in the same area to gauge market value.
- Market Price Appraiser (U.S. Census Bureau): An online tool offering estimated values based on recent transactions and comparables.
Considerations:
- Dynamic Market Price: Warns that the market price can vary constantly based on buyer willingness and other conditions.
- Risk of Underselling: Highlights the risk of underselling if the market value is not fully understood, emphasizing the importance of research for both buyers and sellers.
In conclusion, the article provides a comprehensive guide for real estate investors, emphasizing the critical distinction between market price and market value. Understanding these concepts, along with the tools and considerations mentioned, is crucial for making informed decisions in the dynamic real estate market.
