Fair market value and what it means

Private Property South Africa
RE/MAX

Those looking to buy or sell property have no doubt heard about the importance of fair market value. But what is fair market value and why is it important?

Adrian Goslett, CEO of RE/MAX of Southern Africa says that determining a property’s fair market value is a key element of any property transaction and is a vital concept for all property sellers to understand in order for them to price their home correctly.

“Fair market value is the price that an educated and willing buyer is prepared to pay for a property. This definition assumes that both the buyer and seller are well-informed and that there is no pressure for the transaction to be concluded. When the parties to a sale are pressurised due to, for example, time pressures to move or financial reasons, then the negotiated price on the home may not reflect its true market value.”

So how does a seller go about determining what would be fair market value for his property? Before starting, Goslett has the following tips:

  • Take into account the factors that influence the value of your home such as its location and condition as well as general market conditions.

  • Find out the price that similar homes on the market sold for. It is important to determine the actual sales price, as it may differ from the price the home was marketed for. The properties should be comparable in terms of size, age and features. This will also give an overall picture of the market conditions in your area and what buyers are willing to pay for property there.

  • Consult a local real estate professional and request a valuation of your property. More often than not, an agent will use a comparative market analysis to determine fair market value. This analysis will include statistics from comparable recent sales and those currently for sale in your area.

However, Goslett says that while a comparative market analysis is an important tool when assessing the market value of a property and then determining its ideal selling price, sellers shouldn’t solely rely on this information from realtors; they should check it out themselves. “Sellers should drive around their area and look at homes for sale to see how they compare to theirs.”

Goslett says that sellers should also make value adjustments for certain factors such as views, security and amenities like swimming pools and tennis courts. Other factors that influence fair market value that sellers need to take into account are whether it’s a buyers or sellers market, interest rates, economic climate and availability of finance as well as the average amount of time that homes in the area spend on the market before they sell.

“While fair market value may not necessarily be what either the buyer or the seller wants it to be, it is an impartial calculation which will assist in determining a fair price for the home, no matter what the buyer can afford or what the seller wants to gain from the sale,” says Goslett.

He concludes by saying that it is important for sellers to understand that fair market value differs dramatically from the personal value that they place on their property, which is based on their own memories, preferences and experiences. “At the end of the day, fair market value is the price a buyer is willing to pay and a seller is willing to accept. It's the value of the property in the current market, no matter how much the seller initially paid for it.”

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