UNDERSTANDING COMPARABLE MARKET VALUE

The definition of “comparable market value” for our purposes in this article applies to residential real estate only. Different methods are used to determine values for land, multi-family apartments and other commercial real estate.

DEFINITION:

Comparable Market Value is the price range at which other similar properties in average condition are selling within a reasonable amount of time. 

In order to completely understand the definition, we will break it down into three parts and explain each in detail.

1.   Price Range. Since real estate has no exact value, we must always expect that a property in a certain condition may differ in value in either direction by 5% at any specific time. Consequently, price range is a set of figures with a top and bottom threshold where we can expect that a specific property value will lie.

2.   Average Condition refers to the physical state of the property at the time of move in. Average condition suggests that the property is neither in mint condition, nor in need of repair. And that the fixtures are neither new nor old. Simply put, the property and grounds in average condition is habitable and clean, the fixtures and major components are functional and in good repair. While ultimately the styles and colors of the property as a whole may not match the buyer's taste, the property is ready for move in.

3.   Reasonable Amount of Time is a subjective term that takes into account the financial condition of the property and its owner and respects other issues and constraints that life produces that may influence the owner's willingness or need to sell of the property. In most markets, a seller can expect a property to take 90 days to market, attract an offer, negotiate the terms and close the deal. Home Owners in foreclosure, with illness in the family, or relocating to another area, are not afforded the same luxury of time that other sellers have, and these constraints on their schedule likely affect their willingness to sell exponentially. With that in mind, extreme foreclosure cases and other "distressed" sales should be considered apart from others in the evaluation of Comparable Market Value.

When calculating comparable market value, you must always remember that you are estimating the value of one particular house. The location or neighborhood of this particular house is the starting point for your investigation. The exact same house in the next city, or even on the other side of the same city, is not relevant to this determination. A house located in one specific high end area overlooking the city could very well be twice or three times the value of the same type of house located down the hill on the railroad tracks. While this may seem like an extreme example, house prices throughout the country fluctuate significantly from city to city and from neighborhood to neighborhood. Therefore, whenever you determine the market value of one particular property, you must compare it only with similar properties in the same or nearby areas.

Simply adding the cost of the fix up to the houses current appraised value is not an accurate way to determine comparable market value for a particular house. The buyer will also be required to invest additional time, skill and financing to bring the property up to average condition. The difference in value may very well be two to three times the cost of the repairs. Here's why: Far fewer buyers want to buy a house that requires a lot of work. When a house attracts fewer buyers, it takes longer for the house to sell. To attract more buyers and sell the house sooner, the price must be reduced by much more than the mere cost of repairs.  

In a steady real estate market, a house should regularly sell in 30 to 90 days. If a house sells within one to two weeks, the asking price was probably too low. Our comparable market value will take into account and look closely upon those houses that sold and closed in 90 day period. These sales will best reflect the comparable market value of the home. Consider this scenario: Three of the exact same houses sit in a row. The first house for sale at $200,000 takes almost a year to sell, the second house sells in six months for $180,000 the third house is priced at $140,000 and sells in 10 days. The price that will sell these houses in 90 days is somewhere between $180,000 and $140,000; its comparable market value.

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