What’s it Worth? Real Estate Values Part 1
How Real Estate Values Aren’t Created
It happens every year. People want to sell their home, building, or land and they get unrealistic with their prices. Most come up with super lofty prices and when their listing doesn’t get any bites, they wonder why.
This happens pretty much everywhere. When you’re located in a market that is hot, then obviously your reasoning is rational. But with any normal market, you’ll run the risk of your listing going stale.
The problem with that is that when it goes stale with no or hardly any bites, you’ll have to take it off the market then wait a few weeks and list it again at a lower price.
You’ll waste time this way, but all this hassle can be eliminated from the start if you’re more realistic with your price.
You’re thinking about selling your house that’s sitting on three acres and want to know what you could get for it.
But the real question is which value are you talking about – is it market, as is where is, highest and best use, quick sale or what if value?
Real estate appraisers define “market value” as the most probable price at which a property will sell in an arm’s-length transaction in a competitive market where both parties are motivated, and are acting knowledgeably and without duress.
Market value assumes that: the transaction is arm’s-length and that parties are acting in what they believe to be their own best interests the property is exposed on the open market for a reasonable period of time payment is made in cash or cash equivalent (such as by a loan from a mortgage company) the price is not affected by special terms, conditions, financing or concessions
“As is where is” value is what the property is worth in its current state and without any changes, and it takes into account the current property zoning, conditions and physical or other limitations. Buyers purchasing a property as is take it as they find it.
The purchase isn’t contingent on, for instance, satisfactory results of inspections or use and other types of development approvals.
The risk in an as-is scenario can be substantial. Buyers have to commit to purchasing the parcel before having development approvals in hand and without knowing all of the conditions that would limit or prevent them from using the property as they wanted. Consequently, as-is value is deeply discounted to reflect the amount of risk assumed by the buyer.
The highest and best use is the most profitable use that’s legal, physically possible and economically feasible. An 18-hole golf course wouldn’t be the highest and best use because it’s physically impossible to fit a golf course on just 20 acres.
Likewise, if a parcel were zoned for agricultural or low density residential, appraisers wouldn’t estimate value based on a use for apartments because that use wasn’t legal under the current zoning.
A quick sale value is similar to as is where is in that the buyer agrees to forego contingencies and assumes all of the risk. The difference is that the term “quick sale” usually describes a sale that’s forced by events like foreclosure, court order, bankruptcy or divorce.
Potential buyers can go to HUD for more info on housing.
The “what if” value is predicated on the occurrence of some future change to the property. This could be some type of zoning approval (e.g., variance), a different zoning classification, accessibility of public utilities, or subdivision approval.
What if value is predicated on the highest and best use of the property but it assumes there will be a change in the status quo. This value recognizes that something would have to be done to transform the property from its current state so that it could achieve its highest and best use.
Buyers of development property typically use the what if value in estimating what the property’s worth, but they also take into account the expenses they will have to incur in order to effect that transformation.
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