I keep hearing agents say that properties are selling for way over market value. This isn’t true, and this belief will keep you from helping your buyers get a property.
Many homes are selling for more than asking, and some are selling way over. Many properties are selling for significantly more money than recent comps. That doesn’t necessarily mean they are selling for over market value.
Let’s look at the definition of market value.
“The most probable price (in terms of money) which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue influence.”
I suppose one could argue that a bidding war isn’t a fair sale, but I think, for the most part, it is. No one is forcing buyers to bid, and, often, many buyers are willing to pay a similar price so we can be confident that market value is in the range of the sale price. The exception is if the winning bid is much higher than the next best offer, and this is something that only the listing agent and seller are privy to. (The blind bidding process and non-disclosure of competing offer prices has the potential to allow a sale over market value and at the same time, can shift market value up significantly) I’ve never felt that the process we embrace is good for the market or fair housing, but that’s a topic for another blog. For now, this is the system we use, and your job is to help your clients manage it well.
In a balanced market, REALTORS® have been taught to estimate market value using comparable properties that have sold in the past 90 days. This method of valuation is so embedded in our psyche that we believe that this is market value. It’s not.
It’s merely a method we use to estimate the market value, and when the market is balanced, it’s reasonably accurate.
The market is not balanced right now. We are experiencing the strongest sellers’ market across most of North America that I have ever seen, and I’ve been at this for over 35 years. We are seeing price increases in the double digits in many markets. The demand for properties is unprecedented. Most markets have what I call a buyer pool. This is a group of buyers, more than two and sometimes as many as 100 or even more, who are actively looking for a property in that specific area.
When a new listing comes on the market, it is dropped into the buyer pool, and a feeding frenzy ensues.
When the supply and demand are this out of whack, you can be sure that market value will increase significantly.
To estimate market value in this market, you need to look at a lot more than just the properties recently sold. While this information is still valuable, all it tells us is what a different buyer was willing to pay for a different property in a different market. (Yes, the market changes every day in these uncertain times) In addition to the comps, you need to know the size and the psychology of the buyer pool. How will other buyers behave? Suppose the buyer pool is fewer than ten people, and they are generally first-time buyers with the associated financing challenges. In that case, the sale price will likely be much different than if the buyer pool is 60, and most of them are downsizing and have cash for the purchase. Gathering this information is tricky, but good agents work hard to get it.
Having listings helps you to gather this information. If you aren’t getting listings in this market, you need to have conversations with agents who are.
I’ve also been speaking with mortgage brokers to see how many new buyers they have coming online in the coming weeks and months as that is often the first step buyers make and gives us essential forecasting information.
‘In addition to the comps, you need to know the size and the psychology of the buyer pool. How will other buyers behave.’
Once you gather this more nuanced information, you will forecast what market value is likely to be for a given property. If you’re a math whiz, you can build a graph for this. If not, you could imagine being in the other buyers’ heads and what they are likely thinking in terms of value. It’s not science but the art of estimating market value never is, and it’s essential to your ability to protect your clients. It’s an estimate, or in this market, perhaps it’s better called a forecast.
What we don’t know is where this market is going. It could continue to go up significantly, it could crash, and it could do anything in between. No one knows, not even the top economists.
While you likely have an opinion, it could be wrong, and expressing it could steer your clients to make bad decisions. Be honest with them about what you know and what you don’t, give them the most accurate up to the minute information possible, and help them wade through the uncertainty.
This post is the last blog in a series about representing buyers in a strong sellers’ market. Here are the previous posts.
What Price to Offer in Multiples
Managing Risk for your Buyers in Multiple Offers