Everything You Know About Your Home's Value Is Wronghttp://www.fool.com/investing/general/2013/12/07/everything-you-know-about-your-homes-value-is-wron.aspx Jay Jenkins
December 7, 2013
Ever notice on popular home improvement TV shows how the appraised value of the homes are seemingly pulled out of thin air? It seems, through the magic of TV, that the real estate agent, host, celebrity, or repairman can simply divine the exact dollar value of a home from the direction of the wind. Or maybe it's the smell of the grass on the lawn?
In the real world, there is a little bit more to the process. A proper appraisal will include market research, a little math, and also a little bit of gut feeling from the appraiser to determine the house's "market value."
But market value is not as straightforward as it may sound. Taking a little time now to understand exactly how this estimation works will go a long way toward winning the negotiation and maximizing the bang for your real estate buck.
Defining "market value"
Catch all that? Summarily, the market value of a property is the price for which a buyer and a seller agree to do the transaction, assuming neither is under the gun (i.e., the house is about to go into foreclosure), the house has been on the open market for an adequate period of time, and it's a standard transaction with cash and/or a bank loan.
Think about the stock market for a moment. Every time you buy a share of a stock, someone must be selling it to you. You must be willing to pay the quoted price, and the seller must be willing to take that amount of cash in exchange for her share. It's exactly the same concept.
Please don't think I'm beating a dead horse, here. The nuance of this definition is critical for both buyers and sellers. Take the bank's perspective for a moment.
Banks typically require a down payment of 20% for a traditional mortgage loan. Then they take the house as collateral. Ever wonder where that 20% figure came from?
It's simple: in the event the bank must foreclose on the home, they will take ownership of the house to try to get their money back. If you were buying a home out of foreclosure, would you want to pay full price, or would you low-ball the bank for the deal of a lifetime?
Another example: Since the finan