Summer
2006
SELLING
PRICE, ASKING PRICE AND MARKET VALUE
Price
and Value are words used interchangeably in normal conversation,
but in the real estate world they have distinct meanings.
They have more specific meaning when linked with "sold"
price and "market" value.
The
Selling Price is what someone actually paid for a
property. This is usually the best indication of value,
but not always. There are many reasons why buyers pay more
for a property than its theoretical market value.
*
They are replacing land in a tax deferred exchange to save
tax dollars
*
They own land adjoining their property
*
They "fall in love" with the land
*
They exchange higher price for favorable financing
*
They are uninformed.
On the other hand, there are many reasons why sellers sell
below the theoretical market value. The seller may be under
duress and will accept a low offer because of:
*
Divorce and/or death
*
Impendent foreclosure
*
Loss of job or/lower pay
*
Liquidation of estate
*
Cash needed for alternative investment
*
Lack of good information (uninformed)
The sales comparison approach is the most frequently used
approach of estimating value by comparing the subject property
to comparables sales, called "comps." This
approach is based upon the economical theory of substitution:
*
A buyer will NOT pay more for one property than for another
that is equally desirable. But, there are several problems
that occur when using sold prices as the only estimate of
value:
*
Sometimes there are no comparable sales
*
Sometimes the available sales are totally different from
the subject property.
*
Sales information from MLS is only available to real estate
professionals
*
Sales Information from sources such as MLS is not always
correct
*
Sales information not in MLS is not readily available even
to professionals
*
Motivation that influenced the sellers and buyers is seldom
known
(The
best way to find out the sale price is by talking to the
buyer, seller or real estate agent. A personal interview
reveals information that may have influenced the price such
as motivation.)
The
Asking Price is the most available type of real estate
information to the general public. This data is found in
newspaper ads and from real estate offices. For the past
few years, the Internet has become a major provider for
asking prices… but not selling prices.
Land
owners seldom have access to sale prices; therefore, they
rely on the asking prices of other properties as a gauge
in pricing their land. This can be a big mistake, especially
when these asking prices are unrealistic "dream prices."
Others may make similar mistakes by setting their asking
prices based upon incorrect information about recent sales.
This explains why over priced properties are more common
in rural than in urban areas.
Market
Value is a simple, theoretical concept based on complex
human behavior. Unlike price, value is always expressed
as an opinion or estimate rather than a material fact. Value
is more accurately described as range rather than a precise
number. The process of estimating introduces an initial
margin of error. Buyers and sellers add another margin of
error because they make decisions based on emotions and
personal preferences, not just rational thought.
Determining
the value of land is complex. While this process can be
ambiguous, a professional land broker with experience and
knowledge can remove much of this
uncertainty.
