When selling real estate, sellers typically want to receive the highest sale price possible in a short amount of time. Achieving both of those goals is not realistic when it is a buyer's market. Instead, the seller must decide how low to price the property in order to attract a buyer quickly.
Definition of Property Value
Property values fluctuate. What the property owner initially paid for the property can be vastly different from its current value. In real estate, the value is what a ready, willing and able buyer might pay for the property in the current market. Appraisers and other real estate professionals use statistics from recent sold properties when estimating property value.
Below Market Value vs. Short Sale
Buyers looking for real estate bargains often seek out short sales. In a short sale, the seller is marketing the property for less than what the current property owner owes on the property. The sale price is "short" of the money needed to pay off the property's debt. The lender or lenders agree to accept a lower amount and release the property lien. While a short sale price is below the debt on the property, it is not necessarily below the current market value. Short sales typically occur when property values drop, making it difficult for the seller to list at market value and cover the debts. Therefore, it is possible for a property owner to list a short sale at or above current market value.
Listing Market Value
When listing property with a real estate agent, the agent typically prepares a comparative market analysis, which is similar, yet less detailed, to an appraisal. The agent tries to find at least three similar properties that sold recently in the same neighborhood or a similar area neighborhood to the subject property. After adjusting the final sale prices, to compensate for the differences between the subject and comparable properties, an average of the adjusted sale prices gives the agent an estimate of the market value.
If the seller wants to sell as quick as possible, listing below market value can speed up the process because buyers will typically see it along other similar properties, priced higher, assuming the competing listing agents priced the listings at or above market value. A strategy to move property quickly is to price the property closer to the sale price of the lowest comparable, instead of the average price. Pricing it at the low comparable or under market value can bring a quicker offer. Another advantage when listing below market value, the seller can be fairly confidant the appraisal will come in at or above the sale price. If an appraisal comes in low, it can kill a real estate transaction.
When a house sells below market value, it can lower the property values in the neighborhood because appraisers use the final sale prices of recent sales when calculating current market value. A low sale price brings down the average price used for estimating current market value. However, exceptions exist to that rule. For example, if parents sell a house to their child for a fraction of its market value, the appraiser might discard that sale price because it is not an accurate indication of market values.
- "Modern Real Estate Practice"; Galaty, Allaway and Kyle; 2006
- Arizona Association of Realtors: Short Sale Seller Advisory
- Photo Credit Jupiterimages/Comstock/Getty Images
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- IRS Rules Regarding Below Fair Market Value Rent.