What Determines Fair Market Value?
Those of us living in Mexico who are from other parts of North America can take the concept of fair market value for granted.
We assume that this measure of value is used in other markets and other countries. Actually, it is not common outside of the USA or Canada to commonly have sold market data. In order to have information about sales prices and to adjust for differences in properties; data needs to be available.
Where are the Resources for Consumers?
If we start out with the objective to have fair market value, where, do we as consumers normally go? There are no websites as in Canada and the USA such as Zillow and Trulia offering a large number of properties for sale as well as average sales prices by areas. We cannot check the public records or see sales prices printed in newspapers.
Until 9 years ago, there was no genuine multiple listing system for AMPI agents as a group to collect data effectively to advise a buyer or seller on fair market value.
Some people use fair value and market value as the same, but there is a difference between these two terms. Fair value is the price at which asset is exchanged between knowledgeable parties as an arm’s length transaction. Market value is the price at which the asset is exchanged between parties in the market.
If the buyer and seller are not informed through the open market otherwise, they rely on real estate professionals or appraisals to help determine value based on sales data of similar properties or properties adjusted for differences.
The Importance of Sharing Information
Business, as we know it, works efficiently and to the benefit of the whole, if information is shared. Controlling prices comes when a few have information to the detriment of the many. It is unconscionable when a seller or his agent keep market information from a buyer and sell them a property 100-200% over its FMV. The reverse can be true, an incompetent appraisal of value can cause a seller to sell for too low.
The issue is control. Knowing the fair market value in a real estate market enables buyer and seller to have control. Knowing FMV can help price a home for sale, negotiate a purchase price of a property for sale, and resolve an estate or divorce settlement.
Factors which help determine fair market value:
- Comparable solds within a certain time frame help determine the subject property value.
- Adjustment can be made for differences in size, location and condition of a property.
- Market Trends affect FMV. Low demand versus high demand affects price, as well as high inventory versus low inventory.
- Particular conditions: Bad publicity about crime or health issues, can really affect prices. Builders also can compete against an individual seller who wants to re-sell his real estate within their development.
- Comparative Market Analysis is a common way to determine a property FMV. For it to be a valid CMA, there must be sufficient information on sold properties and their characteristics, in addition to price: condition, location, debt, etc. It amazes me to see experienced agents use “expired”, ‘’off the market” and “active” sales prices mixed in a CMA. This is contradictory and misleading information which can manipulate FMV.It makes sense to evaluate how many expired and see if this is related to price, condition, location, or other factors. A good CMA report shows an estimated value based on adjusted solds. Separately, it is also important to include relevant active properties to assess the competition and to know where the property you are evaluating falls into the mix.
- Appraisals use measurements and improvements to a property as well as allowable uses through zoning and permits. Appraisals are usually done by engineers or appraisers who also take into account in their reports the comparables or sold prices. Beware here that an appraiser understands that location of properties to each other is very relevant, not locations far away from each other: also, to understand not to use active mixed with sold.
- Traditional appraisals are to find FMV from A. Market value, B. Replacement Cost, C. Income.
AMPI is continuing to learn and become more proficient with its Flex Multiple Listing System. As AMPI agents become more knowledgeable and proficient, FMV will be more refined.
AMPI is very aware of cultural differences, and we understand we are operating in Mexico. AMPI also understands the individual’s right for privacy, and we calculate solds without knowing the names or buyers or sellers.
Basic: Harm to all happens when information is with-held for the benefit of a few.
Flex MLS used by participating AMPI agents provides sold data which is available to the agents to help you arrive at FMV if you are buying or selling.
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta / Nayarit (Bahia de Banderas) areas. I recommend that each potential buyer or seller of Mexican real estate conduct his own due diligence and review. If you have any other questions, contact me through my website.