Homebuyers and sellers may be on opposite sides of a home sale, but they have one dilemma in common: They both need to sort through a thicket of prices and valuations to figure out how much a home is really worth.
The holy grail of these prices and valuations is market value, which refers to the price at which a typical seller would be willing to sell the home and a typical buyer would be willing to buy it, according to Leslie Sellers, owner of Leslie Sellers & Associates, an appraisal firm in Knoxville, Tenn.
Market value is gold standard
But while market value is the “goal” or “standard” buyers and sellers would like to ascertain, this amount may be quasi-mythical as it’s not necessarily equal to either the appraised value, as determined by a certified appraiser, or the sales price, which refers to the price at which the property was sold.
The difference between the market value and appraised value may be attributed to professional differences of opinion among appraisers, Sellers says.
“Let’s say the actual market value, which only some super-being knows, is $200,000,” he says. “Leslie Sellers may appraise it for $195,000. John Smith may appraise it for $202,000, and another (appraisal) may be $198,500. We may be all around it, but those are all appraised values and they are all an opinion of what the market value is.”
The difference between the market value and sales price may be attributed to the terms and conditions of the sale. Examples include a highly motivated buyer or seller, the inclusion of personal property, seller’s concessions or the stigma of a home that’s been on the market for a long time relative to other for-sale homes in the area, Sellers says.
Price or value?
Market value is also likely to differ from the asking, list, offer and pending sales prices.
Asking price refers to how much the seller has asked prospective buyers to pay. List price is often used as a synonym for asking price, but technically, list price means the price at which the seller has listed the property with a real estate broker, according to Mark Bennett, a broker and market manager at real estate brokerage company Redfin in Irvine, Calif.
Offer price usually refers to how much a buyer has offered to pay for the property. But this term can be confusing because brokers sometimes use it to mean the price at which the seller has offered to sell the property.
Pending sales price describes the price at which the buyer and seller have agreed to move forward with the sale. The pending sales price could differ from the final sales price if the buyer and seller renegotiate the price before closing.
Whether a buyer’s offer price should be higher or lower than the seller’s asking price depends on local market conditions and the desirability of the home compared with similar nearby homes that are also for sale. The pending and final sales prices of those comparable homes, which realty agents call “comps,” are usually presented to buyers and sellers in the form of an agent’s “comparative market analysis,” or CMA. (Incidentally, lenders refer to a CMA that’s prepared by a broker for a fee as a “broker’s price opinion” or BPO.)
“The CMA is how an agent establishes a fair price for a house,” Bennett says. “That’s where that price comes from. Agents shouldn’t be pulling a number out of their head because they feel they just know the number. They really should be doing some research to figure that out.”
Online valuations can give clues
Market value can also differ slightly or significantly from online valuations calculated by such Web sites as Zillow or Trulia.
Whether online valuations, which are based on public-records data, are on the money depends in part on the strength of the algorithm, accuracy of the data and condition of the home. If the home is outdated or in need of major repairs, an online valuation may be significantly higher than the market value.
Online valuations can be helpful as “a sketch or outline” of market value, Bennett says, especially if the Web site reveals the comps that were used to calculate the estimated value.
“That’s good information because they’ve done the research for you,” he says.
The bottom line is that prices and valuations will differ, sometimes dramatically, and the only way homebuyers and sellers can decide which number best represents the home’s market value is to dig deeper into the data and try to understand the comps and calculations.
“Every price opinion that you get, whether by a human or an algorithm, probably will vary to some degree,” Bennett says. “You have to have confidence in the decision-making process and where that data is coming from before you can have confidence in the ultimate outcome price.”