Market Value vs. Market Price
What is market value and how does it relate to the term market price?
So, what is market value and why is it important for the real estate exam? Also, how does it differ from market price? Well, first you need to be introduced to the term value. Value has many meanings, and a piece of real estate may have many values at one time. The reason for this is that the value of a property is affected by the purpose for which the value is being determined.
For example, a county tax assessor needs to assign a value to a property for property tax purposes. The amount the assessor arrives at is referred to as assessed value and is usually based on the selling price of similar properties.
On the other hand, an insurance company values the property based on how much it would cost to replace. This is known as replacement cost value.
Market value is determined by the estimation of a real estate appraiser. Market value is sometimes referred to as the fair market value of the property. As you see, market value is the dollar amount knowledgeable parties will agree to exchange a piece of real estate in an open market.
Market value has the following characteristics:
– The most probable price that a property will bring (not the highest or average price)
– Payment in cash equivalent
– Buyer and seller unrelated and acting without undue pressure
– The property exposed to the competitive and open market for a reasonable period of time
– Buyer and seller well informed of the market conditions and the property’s use and defects
So, how does market value differ from market price?
Well, the market price is the amount for which a property actually sells for. As you can imagine, this could be vastly different than the market value of a property. For example, say you built a home five years ago. The home cost you $150,000 to build. Currently, five years later, it appraises for $250,000. Its market value is $250,000. However, you decide to sell it to your daughter who just got married for $125,000. The market price of the property is $125,000. That’s a huge difference from the market value of the property.
This brings up another term. Cost. Cost is the amount of money used to construct improvements plus the value of the land.
As you can see, theoretically, market value, price and cost should be the same, but this is rarely the case.
What else can help me prepare to pass my real estate licensing exam on my first attempt?
Other tips to help you pass your real estate licensing exam on your first attempt:
Also, check out our question of the day videos on our YouTube channel: