Property valuation is the process which determines the economic value of real estate.
Property valuation typically seeks to determine fair market value, the price at which a knowledgeable seller willingly sells his/her property and a knowledgeable buyer will willingly purchase it. In other words, it assures both parties have all the relevant information and neither are forced to buy or sell. Fair market value is not always equal to the sale price. For example, a short sale of real estate may not bring fair market value because the seller is distressed and must sell the property right away. Potential buyers know this so they have a bargaining advantage and usually get the property for less than market value.
There are 6 commonly used VALUATIONS terms.
1. Fair Market Value
2. Sale Price or List Price
3. Contracted Sale Price or Purchase Price
4. Assessed value
5. Appraised value
6. Automated Value Model (AVM)
#1 Fair Market Value
A value agreed between seller and buyer for a given real property to consummate a real estate transaction. Let me elaborate. Consider seller wants to sell his home for $300,000 based on their agent’s recommendation. An interested buyer makes an offer for $300000 based on their agent’s advice, and the seller agrees to accept the offer, then $300000 can be defined as the Fair Market Value of the property.
How the agents arrive at a “Fair Market value” is a topic of discussion that I will address in a separate video blog.
#2 Sale Price or List Price – A price set forth by the seller of the real property.
#3 Contract Sale Price or Purchase Price – A price that is contractually agreed upon by the seller and the buyer, i.e., the seller will transfer ownership of the property to the buyer in consideration of money from the buyer. In most situations, this price reflects the fair market value of the property.
#4 Assessed Value – A price determined by the governmental agency for calculating property tax. In the State of Texas, this value is determined by the County in which the property is located, and the property taxes are paid as a percentage of the assessed value.
#5 Appraised Value – A value calculated by a neutral party on behalf of the lender and the buyer for approving a housing loan. Let’s say the buyer has a contract on a property for $300,000 and the appraised value comes to $320,000 then the buyer’s requested loan amount will be approved.
On the contrary, if the appraised value comes to $250,000 then the buyer will be short of $50,000. The lender bases their decision to lend the loan to the buyer based on appraised value.
You might wonder why would the purchase price and the appraised value be different. Shouldn’t they be the same. Keep in mind “appraised value” calculated by the appraiser is an opinion, i.e. opinion can differ and so are the values.
An experienced real estate agent would recommend the right price for the right property, so there are no surprises with the appraised value. They would also address how to deal with situations when the appraised value is lower than the contracted sale price
#6 Automated Value Model (AVM) – These are computer models or program that estimates a value of the property. One of the popular ones is called “Zesstimate” provided by Zillow. While this is another data point of value, their accuracy is highly questionable.
Let us say that you own a house and you are planning to sell. Zillow allows one to claim a property and make changes to the value of the property. For example: Let us say the house is upgraded with gold-plated countertop and value of the property is now worth $200,000 more than what the Zestimate’s value. Once you revise the number the “Zestimate” value will also change.
While “Zestimate” provides a decent estimate of the property value, in the example that I shared, it has no mechanism to verify and validate the influence of a user who can positively or negatively affect the calculation of the Zestimate Value!
To summarize, there are six commonly use property value terms. They are Fair Market Value, Sale price or list price, Contracted Sale Price or Purchase price, Assessed Value, Appraised value, and Automated Value.