Winter 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 adjoins the property

• They “fall in love” with the land

• They are willing to exchange higher price 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 frequent 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 influence the sellers and buyers are 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 had 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 newspapers 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 “dream price.” This may be the reason over priced listing prices are more common in rural areas. There are few comparable sales, uncertainty about real estate value trends, and poor real estate information.

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.