In the context of selling your home or buying a home, what exactly is market value? This sounds like a really simple question. Someone might respond, “market value is the price that someone is willing to pay for a home”. However, there are other factors that must be taken into consideration.
Here is a definition from the Fannie Mae Selling Guide (This definition is also stated in most appraisal reports related to mortgages)
Definition
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated; both parties are well informed or well advised;
- each acting in what he or she considers his/her own best interest;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto;
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
One main take away is that for it to be said that a home was sold at “market value” five conditions have to be met.
Real world application of this point
If a home’s prior sale price was not market value then an appraiser should not use that prior sale as a comparable.