Market Value vs. Inflationary Price Point

The Market Value of your home is defined thus:

“The highest price a willing buyer would pay and a willing seller would accept, both being fully informed, and the property being exposed for sale for a reasonable period of time. The market value may be different from the price a property can actually be sold for at a given time (market price). The market value of an article or piece of property is the price that it might be expected to bring if offered for sale in a fair market; not the price that might be obtained on a sale at public auction or a sale forced by the necessities of the owner, but such a price as would be fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is willing (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take the particular article or piece of property.”

Market value is used to determine what you can expect to either pay or buy a piece of property. This can be problematic. Why? Let’s imagine buying a new house in a development of very similarly sized and designed properties. The price is negotiated between the builder/developer and the buyer. This involves current material and labor costs along with profit and mark-ups. You get the idea. Here is an example:

  1. Earnest Money
Used to secure your building site $12,000.00
  1. Material Cost
The Basic Cost plus your additions and deductions $64,800.00
  1. Labor Cost
Based on Basic Rates plus additions and deductions $72,500.00
  1. Builder Mark-up
This is usually around 7.5% of 1, 2 & 3. $11,200.00
  1. Profit Margin
This is negotiable but let’s say 10% of 1, 2 & 3. $14,900.00
  1. Landscaping
Based on a negotiated price from landscape contractor. $8,000.00
  1. Total Cost
This will be the market price given to a lender should you need a mortgage. $183,400.00

So you need a mortgage. The bank will require documentation of how much you spent for the home and a drive-by appraisal to assure them that the home actually exists and fits in the development. They may require additional information, too.

In any event, your initial Market Value/Price is $183,400.

You put 10% down and get a mortgage for the remaining 90%. Your mortgage would be $165,060. You are the proud owners of new home. You are satisfied. Until …

Fifteen years go by, the mortgage is paid down a little, the development is finished with homes like yours; some smaller but pretty much like yours. Your life has changed and you need to sell your home. You do some math and, based on the CPI inflation rate calculator over your 15 years, you think your house is worth $262,100. The bank shows the principal balance on your mortgage to be $125,628.

So, you call a realtor. You meet with the realtor who tells you that, from his research, the “comparable” sales in the development your house is in, the price for your size home is an average of $142,000 based on list prices and sales over the last 12 months in your development. Shock sets in.

Just doing quick math:

  1. List price = $142,000 (current market value)
  2. Realtor Commission (6%) = -$8,250
  3. Unpaid property Taxes = -$1,300
  4. Title Insurance and Misc. = -$950
  5. Utilities and prorated costs = -$650
  6. Mortgage pay off = -$125,628

What you may estimate net at closing of $5,222.

Much different than if your home value was based on inflation rather than on comparable properties.

If based on inflation:

  1. List price = $262,100 (inflationary price point)
  2. Realtor Commission (6%) = -$15,726
  3. Unpaid property Taxes = -$1,300
  4. Title Insurance and Misc. = -$950
  5. Utilities and prorated costs = -$650
  6. Mortgage pay off = -$125,628

What you may estimate net at closing of $117,846.

This is a huge difference.

Editorial comment: The fair way to set home prices seems to be the price based upon inflation and then the buyer and seller can negotiate from that value point. Just setting the value based upon comparables is not fair if neighboring homeowners are selling their homes well below the inflationary price just to get a quick sale.




About Gary

I am retired, but not tired. I still want to be valuable to others. I know that others are valuable to me. After looking back on six decades, I have asked myself this question: “What do I believe?” My mind filled up. My heart started beating faster. My spirit soared. I post blogs to share what my mind is working on, what my heart believes would help others and, what my spirit is communicating to me. What do I believe, you ask? Decisions dictate your path In love, not hate In tolerance, not prejudice In health, not sickness In wealth, not poverty In kindness, rudeness In happiness, not sadness In encouragement, not discouragement In faith, not doubt In courage, not fear I have been and will be challenged in each one of these beliefs, but the biggest belief is to stay positive and not turn negative. This belief helps me maintain all of the others.

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