If you are new to real estate investing and you would like to find out the difference between the market value and market price, then this article definitely helps you. You will find out the criteria of the most profitable piece of real estate that will boost your business and bring significant income. We will describe the market price and market value in detail and compare their similarities and differences.
The answer to the question: “How much is a house worth?” will rely on the person who is asking. If it is the seller, then he or she will be interested in the price that is higher than the average ones on the market. If the person who is asking the question is the buyer of the property, then his or her interest will lie in the purchase at a lesser price.
Let us define the meaning of the term ‘market price’. The market price is a sum of money that is negotiated between the seller and buyer of the property. In comparison with market value, the market price is easier to set. It mostly depends on the condition of the piece of real estate. So, in simple words, the market price is the sum that the real estate will be sold for.
The price of the property is mainly based on the buyers’ preferences and needs. For instance, some buyers are searching for a perfect location of the property, others need schools and good infrastructure. The market price of the real estate not necessarily corresponds to the original listing price or reflects the true value of the property. The price may be affected by the relationship between the buyer and the seller, emotional attachment to the house, etc.
The market value is the amount that is influenced by various factors: the prices of comparable properties, market conditions, benefits and features of the property, demand, supply, and others. Both the buyer and the seller can make a research on the conditions in the real estate market and then define the neutral value of the property, without any influence of some special factors.
In general, the market value depends on overall tendencies in the market. The synonym to the value of the property is “worth”. Further, we will define the main factors in real estate investing that affect the property’s worth.
Advantages and Upgrades
The value of the property depends on some of its features that can be considered as advantages. For instance, let us take two properties – the ground floor apartment and the penthouse. The penthouse apartment has some significant benefits, like privacy, more natural light, less street noise, and better security conditions. We have to assume that the piece of real estate on the top floor will have a higher market value because it has more advantages than the ground floor apartment.
The upgrades may add value to the property, especially in older houses. The sum of the added value depends on the improvements and the original state of the house. Some features that increase the market value of the property may include the backyard, the vaulted ceilings, the terrace, energy-efficient windows, panoramic view, a good school in the area, and others. On the contrary, some features may reduce the value of the property. For instance, this can be the absence of an elevator in the building.
The main points that define the market value are the prices of similar properties in the neighborhood that were sold to buyers recently. These houses are called “comparables”. While making the real estate market analysis or the analysis of properties for rent in your neighborhood, the real estate agent will rely on the price of similar properties in the area. A realtor usually takes into consideration the following criteria when studying the comparables:
- Recentness. This means that the property for comparison should be sold for the period that corresponds to the last three months;
- Similarity. It is essential to choose the type of real estate that is similar to those you are going to sell: apartment, single-family house, condominium. Also, during the course of the analysis, the realtor should take into account such features, as the number of bedrooms and bathrooms, the year of construction, square footage, the presence or absence of the garage.
- The local area. Of course, the sample of properties for the research should cover the rental properties or real estate for sale in the same area that your piece of real estate. This rule is applied because the properties in the other areas can be governed by homeowners association with different regulations. It is better to focus on the properties that are in areas with similar facilities – schools, malls, etc.
Real estate agent typically selects from 3 to 5 comparables that are similar to your piece of real estate for sale. The problem here lies in the fact that no two properties are alike, so the realtor needs to estimate the key differences in the proper way.
Location is the key factor that defines the value of the property. It affects both market price and market value. Not only environmental matters but also the cost of the building materials, the cost of local labor and the general state of the housing market.
Often the buyers of the property choose the house on the basis of their personal needs, like the property that is close to their job, some medical center, school or restaurant. However, the true value of the property is usually based on three main factors:
- employment opportunities;
- quality of schools in the area;
- proximity to shopping malls, recreational and entertainment centers.
Home Size and Space for Living
The size of the property is an important factor in defining its worth. Only the usable space of the property is important when defining the value. Garage, attic, unheated areas of the house, unfinished basements do not belong to the usable space. On the contrary, livable space increases the value of the real estate. The most highly valued places are bedrooms and bathrooms, so the more bedrooms and bathrooms the property has, the more valuable it will be in the real estate market.
Condition and Age of the Building
New construction buildings are usually estimated higher than the older homes. The newer property will contribute to saving a greater amount of your finance due to the good state of the critical parts, like the roof, the floor, cooling and heating systems, electricity and plumbing.
For instance, if the warranty for the roof is about twenty years, then the owner of the house can save costs on the repair during the next two decades. In the case of the older building, the roof may need to be replaced during the next several years. The home inspection is very useful to determine the areas in the house that may cause problems in the future. The investor may negotiate the repairs with the dealer of the real estate to prevent major expenses.
Even if the property is located in the perfect area, it has various upgrades and it is in good condition, the value of the property can be affected by the marketing conditions – the number of other pieces of real estate in the area and the number of buyers.
A huge number of buyers willing to purchase the property is a seller’s market. If there are many houses but a small number of buyers, it is a buyers’ market. In a buyers’ market, the investors have more favorable conditions to negotiate the price of the property and other options that are vital in the real estate transaction.
Also, the conditions in the real property market influence how long it would take to sell the property. In a sellers’ market, the real estate is typically sold quite fast.
The state of the economy often has a great influence on the real estate industry. If the economic conditions are poor and the rate of employment is low, then the lesser number of people can afford to buy residential or commercial property.
If you are the seller of the property, then you need to monitor the status of the housing market and the rates of appreciation in your local area. This approach helps you to define the best period of time to sell the house.
The Bottom Line
It is vital for the real estate investor to distinguish the terms “market price” and “market value”. These amounts are not always equal.
Market value differs greatly from the market price. It is a more complicated term because market value is subjective and it depends on a large number of criteria, including the benefits of the investment property, the prices of the comparable properties in the neighborhood area, the location, size and state of the building and the conditions in the real estate market. One more important factor is the overall economic condition in the country.
The market price is the mutually agreeable amount between the buyer and seller of the investment property. The market price is the result that is achieved when the supply and demand meet. So, in conclusion, the market price is the sum of money proposed by the buyer and that is suitable for the seller. The market price of the property is determined by its condition, infrastructure of the area and the average prices of similar properties in the neighborhood area.
Finally, the major difference between the market value and the market price is the following: the market value of the property means its worth, and the market price is the sum the property is being sold for.