Who Is Primarily Responsible for Determining the Market Value of the Home You Want to Buy?
This question is, unfortunately, a little more complicated than you might think. The short answer is: depends on who is estimating it. There are 3 main ways to get the value of the home you want to buy estimated: by a listing agent, by a neutral agent, or by an appraiser. And the tricky thing is, all 3 are likely to have different estimations. In this article, we’ll get into which way is the cheapest, which tends to be the most expensive – in comparison with the market price, and what your own role is in determining the price. Just keep on reading before you decide to buy the home of your dreams!
💡 Key Insight: Generally there are three main parties that may determine the market value of a home-- the listing agent, a neutral agent (or your agent), or an appraiser.
What is the Market Price?
Firstly, we need to discuss even is the market value of the home, as we will be using it as a comparison. Wikipedia defines market value as:
"The most probable price (in terms of money) which 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 and knowledgeably, and assuming the price is not affected by undue stimulus."
You might be thinking this definition is a bit too specialized, so let us help explain it to you. A competitive and open market is one where anyone can buy and sell – and additionally, as mentioned in the definition, fair conditions must be applied – no corruption or theft.
A prudent buyer implies someone who leaves no money on the table and does not lose out to other buyers in a competitive market and is under no time or monetary pressure. Undue stimulus implies, at least when it comes to a property market, inappropriate use of influence or incentive from parties different than the buyer – such as pressure from family.
In short, the market value is the ideal value of the house if the monetary value of all things included – from walls to the roof – which would also account for their age and other influences. At the same time, the buyer would be deciding on his purchase alone using only his mind and the buyer and seller would be in equal power positions. In other words, ideal conditions can, unfortunately, never be met.
However, the reason this all had to be explained and the reason it is the perfect comparison tool is that this is the ideal price of the house. The bigger the deviation from this amount, the more beware you should be – the buyer may be setting the price far too high because they think you will still pay it. It also means you’re not getting the best deal and therefore should instead look for other property – of course, only if you aren’t willing to pay the price regardless.
The Listing Agent Option
The listing agent is the agent directly hired by the home seller to get the home sold for top dollar – essentially trying to make the most of the value of the house. This, therefore, means that the price will most likely be the highest one – and comparatively higher than the price determined by the market according to its actual value.
The Independent Agent Option
The second option is hiring an independent agent, or possibly a friend to look over the house price listed and how it compares to the actual house value. Here you may actually get a far more accurate estimate, as the price is likely to be closer to the market value. However, it still begs a few questions. The issue is that you have to keep in mind that around 95% of real estate agents do the job either part-time or sell two or fewer homes a year. The point we are trying to make is – they simply rarely are real home estate experts, and therefore are unlikely to be significantly more helpful in determining the real prince of a property than someone who has no experience whatsoever.
💡 Key Insight: Whether the real estate agent is hired by you or the other party, the main technique that is applied to determine the market value of the house is through a comparative analysis.
The Appraiser Option
Another option is to hire an appraiser before making an offer. Just in case you did not know, an appraisers’ job is to independently assess the monetary value of the given object – in this case property.
Therefore, you would be hiring an independent agent who is likely, due to his or her expertise and independence, likely to give you the most accurate estimate – that is one closest to the market value of the home. However, due to the sheer amount of expertise required, is also likely to be a quite time-consuming process. And in the property market, time is everything. If you choose to do this process, therefore, you are likely to lose offers.
You could of course reserve the house with the buyer, but it is unlikely that they would agree to that – after all, they are probably trying to sell it for as much as possible in the shortest time possible. While your appraiser is determining the market value of the home you want to buy, another buyer will come and put the home under contract before you will even be able to make an offer.
💡 Key Insight: Appraisers have a neutral stance and take a more objective approach when determining the price of the home--they look at things that cannot be changed like the age of the house. While realtors take a more subjective approach--like what are potential buyers willing to pay.
So, What Are the Best Options?
The one option we have not talked about yet is to be working with a home buying specialist who sells scores of houses (or more) each year. This is because you want someone who can advise you precisely on what your offer should be.
An alternative is asking yourself, or your expert, what price would the home be sold at if it is not sold to you but to another buyer instead. This is because the motivation for your purchase is likely to affect how high the price the seller can go. That is, if you need to buy a home in a hurry, the seller may exploit your need and increase the price of the offer. As such, it is always important to consider what price would be given to a seller who is not pressured by time and therefore has the upper hand in the sale.
💡 Key Insight: You need to match the right option for your particular situation. For example: if your home is in dis-repair then consider having a cash home buyer evaluate your property. If your home is in tip-top shape then using a real estate agent is a good option as well
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