Breaking down the concept of market value in real estate investment

Market Value or better put, Fair Market Value is a term that is not an absolutely abstract term for anyone in the business of real estate. A property’s fair market value or FMV  is the price that property a would sell for on the open market. Thus, FMV is significant to those who intend to buy or even sell a property. This term is also widely used in the real estate investment market. Due to the intricacies involved, there is no easy or universal way to determine market value for real estate. However, nearly every market valuation comes down to two factors: real estate appraisals and recent comparable sales.

Market Value Economics

The value of every good in a market economy is based on a discovery process. Producers and resellers propose hypothetical values and hope to find buyers with similar valuations. In contrast, consumers bid up or push down prices based on their changing interpretations of the value of goods. This process is imperfect and ever-changing. For the real estate market, a buyer often times would like to value a property higher than the amount they are willing to trade for that property.

Appraisals and Comparable Sales

An appraisal is simply a professional opinion of value. Comparable sales, also known as the “market data” approach, is the most common way to arrive at market value. Here, the recent sales of properties of similar stature are reviewed to inform judgment.

Comparable Sales Approach

The comparable sales approach,which is a more widely used system here compares a property to other properties with similar characteristics that have sold recently. This method takes into account all the features of the property, for example, its size, the number of bedroom, and the effect that individual features have on the overall property value.

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Capitalization of Income Approach

The capitalization of income approach values an investment based on the expectation of future benefits. This method relates the property’s value to the market rent that it can be expected to earn and to the resale value.

Replace Cost New Value Approach

The replace cost new value method determines the current cost of constructing a property with the same utility using the current construction materials and adhering to current design standards and layouts.

 

Whatever valid factors applied in determining market value as the ones mentioned above, undoubtedly this is an important factor that should be critically considered by every investor.

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