Fair value (fair market value) and replacement value are used to describe the market sentiment and estimate re-build costs. Assessing price versus value is like build bridges for the seller (high asking price) and buyer’s best price offer.
Fair Market Value or Replacement Value
What is a Property worth?
Assessing price and value
Enquiries about the price of a property are common when looking to buy. But price does not equal value. However, as valuations here discussed what is the true value? That opens the door for all sorts of speculations.
If you look at specific properties, you can clearly see how the value differs from the price when property A grows in value at a far greater rate than property B, because B is in a secondary class location. In terms of capital growth high value properties out-perform the market whilst low value properties performers below the average.
Value beats price
The fair market value (purchase price) is not so much about the price the buyer pays at the time of transaction but what value can be achieved in the future because the property appeals to the larger group of interested buyers. Usually owner occupiers are likely to pay the most for the desire of owning something they were looking for.
A bargain mentality on the other hand can be a hindrance to purchase high value property because a cheap class B property will likely always remain that way.
Value of country’s assets is a political game
Think about when rising on national level the house prise from 300k to 400k, then suddenly home owners feel 100k richer. Buyers spend 100k more on their mortgage and the debt levels are rising accordantly. Possibly you can imagine why all the different valuations such as CV, QV, GV are tools to manipulate the market.
It is for councils a wonderful tool by “mouse click” to increase the CV to charge home owners higher property tax (rates & levies). It is a computational figure; no human is generally involved in CVs and rate assessments. No one takes in account the condition of the property and only general lodged building consents have an effect on the estimation.
For banks it is a good deal, too. When the value doubles, the size of the mortgage doubles for the same property. Everyone feels richer, right? The sentiment around property valuations has sparked again with rule changes when applying for a mortgage.
Fair market value
When negotiating the fair market value (purchase price) you have to build bridges for the seller who wants to get the highest price and the buyer’s bank takes the lowest valuation as basis for the LVR (Loan to Valuation Ratio).
You have to overcome your feelings that property valuations do not really reflect what you see at property inspections. The CV often required by the bank is a good example for a valuation that does not reflect the property value at all.
When using the RV as basis I found several times that the professional guess work had limitations in setting a realistic figure due to chosen sales comparison (references between best and worst sale). Because of the lack of competitive properties those RVs were just another figure deepening the confusion. In any case do your homework;
· Find out the average house value for in that area (size and type of properties that give you broaden market value or price range)
· Do a pre-offer inspection (is important for the right starting offer not to upset the seller, variations you will negotiate during the due diligence after your offer has been accepted)
· Get value for money through due diligence
Reasonable prices and market values depend on people’s income. If nobody can afford to buy that would kill the demand - one of the key market drivers. So let me look at the affordability discussion in a separate blog post—again a hot potato in election year 2017.
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