If there’s one thing that determines your loan’s approval just as much as your credit score, it’s the home’s market value. This value can make or break your loan. Understanding it is crucial to your success in buying or even refinancing a home.
What is Market Value?
A home’s market value is the amount it will for within 30 – 90 days. This is what the real estate market considers a ‘reasonable timeframe.’ The value is more of an opinion than fact. It’s what the real estate professionals assume the home would sell for in the real estate market. The value is based on many things including:
- The status of the real estate market at any given time
- The supply and demand for the particular type of home
- The sales price of comparable properties within the last 6 months
What Market Value is Not
The one thing market value is not is the home’s price. Just because an appraiser says a home is worth $200,000 does not mean a buyer will pay that amount. They may bid more or less because the bid usually comes before the appraisal.
The Relationship Between Value and Price
A home’s market value could increase the demand for the home. This could in turn, increase the price. However, there are other factors. If the supply in the market is high, the price for a home can go down. The value will not play a role since there are many homes to choose from.
How Sellers View Value
Sellers are often emotionally tied to their home. They automatically give it a higher value than a neutral 3rd party would give it. For example, a home may have features that the seller considers valuable, but which a potential buyer does not. Features the buyer does not love bring the buyer’s view of the value down. Sellers often inflate the value of certain features as well. A good example is when the seller puts new windows on a home. He may expect to get a full return of his investment from the new windows. In reality, the seller will likely only get a very small fraction of that investment back.
How a Buyer Views Value
Buyers look at value based on what the home can provide for them. What are the home’s features? What are the home’s conveniences? These are the things the buyer looks at in order to determine a home’s value. In other words, how much is the home worth to them? Are they willing to enter into a bidding war to win it? The buyer won’t likely put much value on the new windows or a new roof. They expect a home to have those things. They also expect them to be in good condition on any home they purchase. It’s not a unique aspect – they can get windows or a roof on any home.
How the Market Value Affects a Loan
Where the market value really matters is the home loan. You can bid whatever you want on a home, but if the market value doesn’t at least meet your bid, you can’t get a loan for that amount. Here’s an example:
John bid $200,000 on a home. The seller accepted the offer. Now John is going through the loan process. The appraiser came out and determined the home to be worth $180,000. John was getting a conventional loan and putting 5% down. In other words, John was putting down $10,000 and borrowing $190,000. That’s more than the home is worth. The lender will not loan John the money. The only way they will is if John makes up the difference between the home’s value and the bid.
In reality, it probably wouldn’t be smart for John to pay more than the home’s value. He would enter the transaction underwater. That’s not how you want to start your real estate investment. If the seller isn’t willing to lower the price to the market value, John should probably walk away from the home.
As you can see, the market value plays an important role in the home buying process. It not only affects what you bid, but also if you get a loan. Before you bid on a home, do your homework. Find out the estimated value of a home by using the resources online or by asking a real estate professional. This way you can avoid overpaying for a home or facing disappointment right from the start.