Adjust for Financing when Pricing Properties

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Trying to determine the market value of a piece of property in a stable market is pretty simple.  Just find a few comparable homes in your area to find a probable range of values.  In today’s volatile Real Estate market, adjusting for factors such as property rights, conditions of sale, and market conditions, as well as size, location, and features, is a must.

SELLER FINANCING ARTIFICIALLY INFLATES PRICE

Sellers may provide below market financing in an effort to lure potential buyers, induce a sale, or to maintain a façade of higher prices, especially in a condo or planned unit community in a down market. Developers selling recently constructed property in a community have an extra incentive to maintain high market prices since they are concerned with the sale of multiple properties.

They may arrange to pay points to a lender in order to lower the mortgage interest rate for the buyer or provide for certain upgrades or other benefits. Individual home owners may provide purchase money mortgages, installment contracts, and wraparound loans and other non-market financing.  Seller financing has been quite effective in attracting home buyers in today’s tough economic landscape.

ADJUST PRICES DOWN FOR BUYERS WHO RECEIVE GREAT RATES

There are times where an extremely credit worthy buyer (due to a wealth of highly liquid assets, stable income stream, and little debt) will receive a below market rate loan from a bank. Property becomes much more affordable for these highly sought after purchasers.

However, market value is determined by what price a typical buyer and seller would agree to to induce a transaction. Investigations need to be made to ascertain what adjustments can be made and supported by market evidence for below-market financing or you run the risk of overpaying for your home or investment.

Photo Credit: defrost.ca

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.