The market value of property sounds like a fairly simple idea, especially when talking about the real estate market, right? You might be thinking, “market value is how much a property will sell for if it is put up on the market”. This is true in the simplest terms, however, there is so much more that goes into the market value of a property than one would think.
According to the Uniform Standards of Professional Appraisal Practices (USPAP) market value is described as “a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership, or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.”
The definition of market value as according to Fannie Mae, “Market value is the most probable price that 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, knowledgeably and assuming the price is not affected by undue stimulus.”
In layman terms market value is simply what the believed value of a property is at the time of the sale of that home between a typical buyer and typical seller, (assuming no relationship between buyer and seller and no seller-paid closing costs, etc.) It seems a lot less complicated when stated just a little differently and is essential when determining what is arv as a real estate investor or the value of your own home when getting ready to sell.
Fannie Mae, also better known as the Federal National Mortgage Association (FNMA), is a GSE (government-sponsored enterprise) and was founded back during the Great Depression as a part of the “New Deal” in the attempts to help stimulate the growth of the real estate market. Basically Fannie Mae buys loans from mortgage lenders and resells them as a mortgage-backed security to new investors.
How Is Market Value Determined and Why Is It so Important?
First, let’s discuss exactly how market value is determined. There are 3 different approaches that are used regularly by licensed appraisers.
We will start off with the most commonly used Sales Comparison Approach. This method is easy to determine from the name and is so commonly used because it makes the most sense when trying to estimate the value of not just homes but anything for that matter. This method determines value based on similar properties in the area that have recently sold. These other similar properties are better known in the industry as “comparables” or “comps”.
The appraiser will take the difference in property/land size, amenities, and any other special characteristics and properly compare them to the current home they are appraising. Being able to properly determine and account for these differences really depends on the appraiser and their experience, not only as an appraiser but in the area that they are appraising homes in.
There is also a second type of method appraisers will use when calculating the value of a property. This method is called the Cost Approach. This method is rather interesting because it determines the value of the property based on how much it would cost to completely rebuild the property, minus depreciation.
For newer homes, this method can be a rather accurate way to determine the value because the same sort of materials and styles are still being used in everyday construction. This would be considered more of a replacement cost because you would be replacing the property in its entirety.
For older homes, this method isn’t nearly as accurate because the cost of materials, as well as the styles, are out of date. This would be considered more of a replacement cost because the appraiser would need to do more guesswork of what styles and materials would be used to rebuild that would be comparable but not exact. Honestly, the Cost Approach is used more for commercial, public, and industrial properties.
The third and final method of determining property values would be the Income Approach. It is as simple as it sounds. If a property (such as apartment buildings) helps supply income or has the possibility of yielding income then this is taken into account when deciding the market value of the property. It is super simple and makes complete sense to factor any income potential into the value of a property.
Market Value in SW Florida
Currently, the real estate market in SW Florida is steady-to-slowly increasing in most of our market areas, and has been since around 2013. The market is always slightly fluctuating up and down but not significantly and has stayed at a fairly consistent pace increasing slowly over the last few years. The last major real estate crash in SW Florida was around the same time that the rest of the market crashed in 2008.
The market had started to decline around the end of 2006 and didn’t stop until around 2009 – 2010. Around that time there has been a great imbalance in the supply and demand of condos and homes, an over-supply of new-construction, in the SW Florida area. There were more homes, condos, short sales, and foreclosures, but no one was buying property at the time.
For the most part, the real estate market in SW Florida is on the rise in most areas, and has not shown any signs of slowing down. Now is a great time to be buying and selling homes in Central and SW Florida. If you need an appraisal, RE Appraisal Associates of SWFL is ready to help you with a private appraisal as soon as possible. Just give us a call at 941-743-3700.