Last Updated on Sunday, 03 August 2008 04:39 Written by Carl Johnson
Have you heard about the guy who bought a house at 60% of what is was worth? Lots of people seem to have heard something similar to this and are out looking to get a great deal like this one. This is OK. But what really concerns me is that most buyers do not understand what that "great deal" really means......Have you heard about the guy who bought a house at 60% of what is was worth? Lots of people seem to have heard something similar to this and are out looking to get a great deal like this one. This is OK. But what really concerns me is that most buyers do not understand what that "great deal" really means. They do not understand what the term "worth" means. When they get out in the market the excitement can turn to disappointment.
The confusion comes from the "friend of a friend"story and the misunderstanding of the term value. The stories get twisted around because many terms related to "value and worth" are misunderstood and used interchangeable when they should not be.
Buyers and sellers are confused about what the value of a house is and the meaning of several terms that are thrown around. So I thought it would be helpful to bring these terms to the surface and talk about them. So here are the common references to value that people refer:
- Assessed Value
- Appraised Value
- Asking price or list price
- Sales price or closed price
Let me start with the real answer to what fair market value is. Fair market value is the price a ready, willing, and able buyer will pay and a ready, willing, and able seller will accept for a property under reasonable and ordinary conditions. Very short and very simple. But the key are the two bold terms, will pay and will accept. A buyer must actually step up and pay the amount offered and the seller must actually get that amount for you to have a true determination of value. More on this later.
The confusion comes about because most buyers and sellers want to know what the fair market value is before the fair market value is established, in other words, before they actually make an offer or accept an offer. So they turn to these other indicators trying to grasp for that elusive value. But remember, it is the ready, willing, and able buyer and a ready, willing, and able seller who ultimately determine what a property is worth. No one else!
Assessed value- this is what towns use to fairly collect taxes from all the properties in a town. The assessed value is based upon the value of the property at a moment in time. This could be as long as 5 years. The assessed value has nothing to do with the fair market value of a home. Let me repeat that. The assessed value has nothing to do with the fair market value of a home! Yet many people rely on this figure as if it were the absolute determination of the market value of their home. In fact many agents use it in marketing to entice buyers with phrases like "priced $50,000 below assessed value". Again the assessed value is just a way for the town to assign relative values to properties on which to base taxes. Nothing more.
Appraised Value- This is a bit better at providing an indication of fair market value for a property. Basically an appraiser will go through the home and then compare the home to others that have sold recently to determine a fair market value for the property. But here again this figure is not an absolute determination of the worth of a home. The appraisal is usually used to protect the bank that loans money on a home. They just want to make sure that the property is being bought at a reasonable price.
I have three problems with appraisals. One, the appraiser often has "a priori" knowledge of the value of a home. In other words, in most instances the appraisal is being done because a buyer and seller have already agreed on a price. The appraiser is confirming that the price is reasonable. Second, the appraiser just has to find 3 comparable properties to support the price. If there are 20 comparable properties with varying sold prices, they can choose 3. Since they already know what the value of the property is (remember, they already know what the buyer and seller have agreed to) they can choose 3 to support that value. Third, appraisers are often looked at as providing the best determination of value and a lot of weight is given to them. The problem is, I have never met an appraiser who has had to sell the property at the price they provide!
Asking price- In some cases this number has little to do with fair market value. Though, in todays market most houses are being marketed with list prices that are close to fair market value. As a seller I can ask anything I want for my house. I could ask a million for it. I does not mean I will get it! An asking price is merely an indicator of what the seller is expecting to get. If the home is being marketed with a real estate agent then I assume that the price is at least close to fair market value. However, real estate agents do not set prices at which homes are listed. That is up to the seller. An agent does a market analysis to determine a fair price and advises the seller. But ultimately the seller sets the list price.
Close Price- This is the only price that really means anything. This is the real determination of the value of a property. A price at which the buyer and seller agreed. This is what counts most. I can have a property that is beautiful and may have taken $800,000 to build, but if no one is willing to pay $800,000 for it, then is it really worth that much? A property is worth what a buyer and seller agree that it is worth and what a buyer is actually willing to pay for it. This last part is important because sellers will often tell me that they have friends who have told them that the sellers house is worth X dollars and they love the house. Or they would buy the house from them for X dollars. X is usually way above what I would consider to be a fair price. Just a quick tip, your friends are being nice and telling you what you want to hear! If you don't think so, offer to sell them the house for 5% less than what they told you it was worth. See if they buy it. If not then it doesn't mean much. The house is worth what someone is willing to actually buy it for.
This brings us back to the tale of the "friend of a friend" who bought a house for 60% of the value of the house. What does this really mean? Did he get it for 60% of the assessed value? Did he get it for 60% of some appraisal that was done in the past? Did he get it for 60% of the list price? It is important to understand this 60% number.
Chances are that the "friend of a friend" got the house for 60% of the assessed value and probably at 95% of the list price. How do I know? There are many instances of homes that are assessed way over fair market value. A home could very well be assessed at ,say, $330,000 that is on the market at $220,000. Manchester, for example, is full of 2 family homes in this situation. I can also point out the fact that the average sell price to list price is about 95%. So on average, a house in this area will sell for 95% of the asking price. See the market report for June.
The reason I bring this whole issue up is that I get buyers who have heard the "friend of a friend" story and are very excited to go out and buy a home and get a great deal like their friends friend. They search and find a great home and are very excited. They make an offer at 80% of the asking price. They are very disappointed when the offer is refused and can not understand why the seller is not anxious to accept their offer. It often takes two or three such rejected offers before the excited buyer understands how the market really is.
Understanding these different references to "value" will help the buyer understand the real estate market much better. You can get a great deal right now, it just may not be the killer deal you think it should be. If you really want a great story of your own to pass along then just tell your friends you bought the house at 60% of its value and use the assessed value as the basis. They won't know the difference and it will sound great!
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