Real Estate Purchase is one of the biggest
What is Fair Market Value?
Today we’re going to talk about one of the most basic BUT VITAL parts of any property sale – what is fair market value?
Today we would like to talk about one of the most important things that a buyer or seller goes through when they’re selling their property. Today we’ll talk about the fair market value, and there are important questions that go along with this, such as:
What is fair market value?
How do you start selling your property?
What are the correct steps?
Do you go forward with marketing right away?
One of the most basic things you have to answer when you’re going through the process of selling your property is how much will you price your property, and there are several facets that may influence the price.
Through this article, we’d like to be able to answer the following questions:
What is fair market value?
What is the importance of fair market value?
How do you use fair market value?
What’s the significance of the fair market value in the discussion and in the negotiation of your property’s sale?
BUT…. before we dive through the list of activities that we have to go through into selling your home as far as marketing, making a write-up, making marketing collaterals, boosting your ads, talking to clients, bringing them to the site, negotiating, drafting the contract, we have to settle first the most basic question as to how much will we actually price your property.
Now, the benchmark for which is what we call the FAIR MARKET VALUE. Let’s not delay it any further. Let’s talk about it, and let’s first define it.
What is fair market value? According to Merriam Webster Dictionary, fair market value is a price at which buyers and sellers with reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business.
In simple terms, it simply means that it is the price where the buyer is willing to buy a property and the seller is willing to sell the property. This is where you define the sale as the meeting of the minds.
So in this particular scenario, this means that the seller is not in any kind of abnormal pressure or any external pressure to sell the property at any rush sale or fire sale price, but is selling it without any intervention whatsoever. And the buyer, without having any particular pressure of any sort form any outside source is also willing to buy. That is what we call the fair market value of the property.
So the fair market value simply defined without all of these highfaluting words, is the price where both the buyer and the seller are willing to purchase the property without any external pressure. That’s the simple, most basic truth about fair market value
THE WHY.
Now, why is this important? The reason why this is VERY IMPORTANT is because PRICE is one of the most important factors as far as buying property is concerned. Most especially given that properties are one of the largest purchases you’ll ever do in your life. What’s the repercussion if you overprice? Here’s the thing. When you overprice a property it usually stays on the market for quite a long time. Is this bad? Is this good? Does it harm you in any way? What happens? Well for one, if your goal is to really sell a property, you will not be able to liquidate it right away because it’s going to stay in the market.
Number two, if you are posting it a way higher price compared to the correct fair market value, that more or less the market has a certain feel of what it should be, then your property may cause all of the other properties around the area to sell except yours because most of the other sellers will use your property’s price as the benchmark, and then they will use it to negotiate theirs for a lower price.
That’s just how the market will behave naturally in a setting where somebody’s overpricing their property. So those who are selling the fair market value will be able to sell their property in a quick manner, and those who are selling it at the fair market value, or usually way higher than fair market value, will sell their properties at a quite later date, except of course in a few exceptions where you’re offering quite a premium compared to the other options, then that’s a totally different case, and it can also be acceptable at times. But today we’re going to confine our discussion just to simply the fair market value and its uses.
Another reason why you don’t want to overprice your property is that when it stays very long in the market, usually you call these days on market in some other countries, but when you do have a property staying very long in the market without anybody buying it, the buyers tend to think that there’s something wrong with the property. If it’s been on sale for a year, and nobody’s looking at it, buying it, it’s still there, whereas sometimes there’s really nothing wrong with the house or the property itself, some buyers tend to think “What happened to this property? Why isn’t anyone buying it? There must be something wrong.”
This is true most especially nowadays in the day and age of the internet where people, most especially the buyers, look for properties online and they don’t have the opportunity to talk to the seller so that the seller or the buyer can give them a heads-up that this is what’s happening to the property, it’s been in the market for so and so, and there’s nothing wrong with it, you don’t have this opportunity to address these concerns head-on right away. But if you put it in the description it will appear very defensive. So how do you address this? The real easy way is to actually price it at precisely on the correct fair market value. So that’s one of the ways where fair market value comes into play.
Another way it could go wrong for a person trying to sell his property is when he underprices the property. Sometimes people try to price their properties in an emotional way, and sometimes they leave a lot of money on the table because they tried to price their property according to the price that their neighbor is selling thinking that this is the fair market value in the area. Sometimes it’s wrong, sometimes it’s right. However, we shouldn’t price our property based on hearsay. Sometimes this is overestimated because they just want to create a story, they want to tell you that they sold their property for so and so price. Or sometimes it’s underpriced because they were selling under pressure. Whether they have to move out of the country, they want to upgrade to another property and they’re chasing another deal, or they need to sell the property because they need to chase a business opportunity. All of these are abnormal pressures that put the property’s price at a compromise. Whether you’re selling for a lower price or a higher price, it may not be the correct fair market value.
Sometimes when you’re pricing a property based on emotions or how you feel like the property is supposed to be priced, you may not realize it, but sometimes, (and I’ve seen it happen before), you’re selling it way below the fair market value.
While you don’t get inquiries ever day because it’s a property and it’s not a basic need wherein you get buyers everyday like food and coffee, sometimes you don’t get the inquiries but sometimes a buyer just swoops in, wants to buy a property right off the bat, and without you realizing it maybe a year after, or several months after, closing the deal, you realize that your property was sold at a way lower price than the fair market value. That’s actually detrimental because you’re leaving a lot of money on the table which should have been yours by the way.
So how do you know this? I’ve seen this happen in the past. Some people try to sell / market the property by themselves without hiring a professional and since they don’t know the fair market value, they’re able to sell the property at a way lower price, sometimes 30% lower than what it should have sold for.
30% – that’s a lot of money lost! Most especially given the prices we are discussing here. (Didn’t we mention the property is one of the highest purchases / sales you’ll do in your life?)
So sometimes you find yourself trapped in a place where you’re actually selling your property way below Fair Market Value, BUT you do know you’re leaving a lot of money at the table. Sometimes when you say yes to your buyer, you feel like you’re doing the right thing because you’re being a good person, you just want to sell the property, you don’t want to offend them, you just want to sell it properly.
On the contrary, sometimes when you’re saying no to a buyer, you think you’re being a good negotiator, and you’re acting tough, and you’re being intelligent about these decisions.
There’s a right and wrong way of doing this politely of course, properly, and in the correct manner as far as negotiation is concerned. But knowing when to say yes and when to say no are very critical points when you’re closing the deal on selling your property.
Negotiation is an entirely different topic from today. It’s a huge topic to discuss. There are just so many facets. Even some people write books about negotiation itself, so we will not be able to cover this today in this video, but knowing when to say yes and no at the most critical time in your life when you’re selling one of your largest assets to date could be something very important.
The easiest thing you can actually do is to hire a professional to do it for you, and it doesn’t cost an additional fee because it’s already included in the contraction costs.
So how do you determine the fair market value in a particular area?
Different cities, different areas, even different streets can have different prices. Even right within the same village, there are also different prices depending on which street you’re actually seated on.
That’s a fact.
So how do you really determine the fair market value? Do you rely on hearsay? Rumors? Relatives’ free advice? Friends’ free advice? Country club rumors? Restaurant rumors? Or putting up for sale signs? Or do you go online and check out how much properties are selling for in the area? Those are not the actual close prices.
To know the fair market value of a property, one way is to the actual selling prices of other properties relative to your area. Another way to estimate the value of the property is to do a replacement cost new. That is typically the price as to how much it will cost nowadays to build the same property or to buy the same property in the same area.
So in estimating the fair market value of the property in any city, you can take a look at the average selling prices of the properties in a particular area, or you could also try to see how much it will cost you to build it from ground up. That’s just one of the methods to do it. But then again in the Philippines, we really don’t have any proper multiple listing system that’s an easy way of putting it. But there are so many factors that affect the price of the properties in a particular area, most especially nowadays that there are so many developments that are happening, and as far as infrastructure is concerned you might want to consult with your professional realtor about how much they can appraise your property, or better yet you can also go to an appraisal company so that they can have your property appraised in the best way possible.
So what did we learn today? Today we learned that determining the fair market value is highly critical as far as selling or not selling your property is concerned. It is the benchmark of the correct pricing of properties in the area and it will also affect whether you’ll be able to sell your property in a timely manner or if it’s going to stay in the market for quite a long time.
I hope today’s article was able to give your more value for you and your investments and/or real estate business, and we look forward to seeing you again here in our channel Live Here.
