We are all aware of the recent decline in home values. In fact, our current economic condition is largely a result of this issue, so determining the correct “market value” of a home is essential to both buyers and sellers. No buyer wants to pay more for a home than it is worth and no seller wants to sell their home for less than it is worth. In addition, lenders also need to determine the market value of a home before they provide the funds to purchase or refinance it. As a former real estate agent, I have seen first-hand how market value is determined and exactly how it works. It can be a wonderful thing for some and a devastating thing for another. If I had to share the truth about how to determine the current market value of a home with a family member, my best friend or anyone that trusts me, I would tell them what I am about to tell you.
First and foremost, the market value of a home – like anything in the market – is determined by what a willing buyer is willing to pay and what a willing seller is willing to sell. If you list your home for $200,000 and all the buyers in the market are only willing to pay $150,000 for it, then you will not be able to sell it for $200,000.
I was in the grocery story one day and the lady in front of me paid $16 for an organic watermelon. I was stunned because I would never pay $16 for a watermelon; unless of course I was starving and the $16 watermelon was the only food item on the shelf, then I would gladly pay that price, or more. The same scenario occurs in the real estate market. Demand determines the price. During the peak real estate market home prices escalated because there were more buyers in the market than homes. Because demand was high, prices were high. Today, demand is at an all-time low, so prices are low. Many have lost their jobs, the economy is uncertain and fewer people are in a position to purchase a home. If you are a seller, this means that the market value of your home is not determined by what you paid, what you owe, what you want or what you need. The value is determined by what a consumer is willing to pay “today”.
If the market value of your home has declined since you purchased it there is a good chance that you owe more on it than you can sell it for, i.e., you are “upside down” on your mortgage. If you need to sell it, then you will either have to come to the closing table with cash to make up for the shortfall, work out a resolution with your lender, or face foreclosure. If you are unable to pay for the shortfall then you could qualify for a “short sale” with your lender. HomeTelos works with various lenders in a new innovative, pre-approved program called the Loan Exit Option program (LEO) in which your lender may approve the sale of your home to a buyer for less than you owe and forgive the shortfall. Read more about this program in my blog post titled HomeTelos LEO – Real Benefits for Homeowners, Agents and Lenders.
In Part 2 of How to Determine the Market Value of a Home, I will share with you how you can determine the actual “value” or “price” you can expect to sell or purchase a home for. This method is known as a comparative market analysis and it uses real market data to determine an approximate “price” or value of a home. If you are a seller, understanding this market data analysis will help you not only know what price to list your home for, but ultimately, how to sell your home at the highest market price in the shortest amount of time. If you are a buyer this same method will help you purchase the best house possible at the best possible price. Until then, check out the additional helpful information on our HomeTelos blog.