Market Value and Why It Is Important to Investors.
Hello and I welcome you to my appraisal blog.
We hear talk about After Repaired Value (ARV), Investor Value, Salvage Value, Insurance Value. But, the truth of it. You should understand Market Value, its definition, and how appraisers come to their conclusion. Market value to an investor is a lot different then the general public's perception of what market value is.
Fannie Mae B4-1.1-01: Definition of Market Value (04/15/2014):
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. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated;
- both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Legal (general) Black’s Law Dictionary 2nd pocket edition (2016):
The price that a seller is willing to accept and a buyer is willing to pay on the open market and in an arm’s length transaction; the point at which supply and demand intersect. (fair market value).
Why is this important to a BRRRR investor? Most, not all, lenders in mortgage space rely on MARKET VALUE. To evaluate their risk on a deal or an entire mortgage portfolio. So when you're trying to figure out what to pay for the property, and develop the costs to repair or improve the property. Wouldn't it be nice to have a clearer idea what your property can be refinanced for? And guess what? Cost does not always reflect an increase in overall value. Adding a full bath may cost $10,000. But, only gives you $7,500 in market value. Or converting a car port to a garage costs, $5,550, and gives you a market value increase of $8,000. we will get into how appraisers determine what the market will value certain aspects of a property are, in future blogs. Understanding the mechanism for value is understanding simple supply and demand concepts.
I hope that starts a conversation on the importance of and the understanding of the appraisal. And understand the appraisal process. Let me know what other things about appraisal that readers don't understand. I will try my best to clarify those things through out this blogs life.