According to Fannie Mae (a government-sponsored enterprise created by the United States Congress):
“Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated;
- both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
So what does it mean to us in the real estate industry? What do we say to the bottom-feeders and all those looking for that great deal they heard about through the grapevine? Conversely, what do we say to sellers that feel lower prices by some tend to lower market values for all?
Based on the above, it takes two to tango. On the one side, most buyers are typically motivated to pay as little as possible to purchase a property. Along the same lines, sellers are typically motivated to get as much as they can for the sale of their property. However, the remainder of the bullet points above must be present for a fair market value transaction to occur.
Conversely, when all the bullet points mentioned above are not satisfied, there may be sales that do not reflect the norm for a particular market area. When this occurs, I always say, that was then, and this is now. In other words, transactions not considered to be “arm’s length” do not by themselves establish new market values in that market area. To state this in a different way: What does one past transaction have to with today’s market value for all properties if one sale transaction is not arm’s length when compared to other transactions in the same area reflecting higher prices?
Let’s consider a specific example of a property owner in a gated community that has medical issues that require immediate cash. When this occurs, an analysis needs to be done to compare liquidation options and marketing periods. Generally speaking, the analysis should consider priorities under the circumstances. For example, do we sell the primary residence or a second home? For most of us, the second home faces the chopping block and becomes the first option to consider.
If and when this occurs, a professional real estate broker should be consulted to determine pricing for the desired marketing period. To be sure, answers to these questions depend on the second home market in any specific area. Whatever the case, the real estate professional takes all things into consideration and prices the property according to the time frame needed by the seller. To be sure, this type of sale will call for pricing well below prevailing market values.
Based on all the above, should this type of “fire-sale” affect market values in general? I think not. The real question becomes how many fire sales does it take for overall market values to be affected? Moreover, how long do reduced-price properties have to remain on the market for that to bias overall prices downward?
As you can imagine, lots of fire sales and lengthy marketing periods in any area makes other owners in the community uncomfortable. And if this occurs, other factors need to come into the equation to determine prices and marketing periods––for example, functional obsolescence, infrastructure deficiencies, or high-maintenance fees that need attention. However, if sales below market value occur quickly and demand remains strong, those sales at a discounted price become history and discounted prices will no longer be available. In one sense, this shot-in-the-arm, or influx of new owners, may just be the boost or momentum the community needs. To summarize: When a buyer and seller are typically motivated, well-informed, and each acting in what he or she considers to be his or her own best interest, all conditions requisite to a fair sale are in place. So, don’t be afraid of a few motivated sellers. It just may be the boost a community needs to gain new momentum.
Image courtesy of William Holden
William Holden is the exclusive agent representing the Dominican Republic real estate market as a member of the Haute Residence Real Estate Network. View his profile or contact him here..