Market Value (Continued)
have the replacement cost approach, the income approach, and
the "market" approach. These approaches will define
FMV, right? Well, maybe?
have all heard some definition of "fair market value".
It usually goes something like "the price a willing buyer
will pay, and willing seller will accept, where duress is
not a factor". Here again, we are trying to define "market
value" without defining "market". The purpose
of this article is point out that you cannot separate the
two. Value determines your market, and vice versa.
define "market". Here is one definition that will
illustrate that you cannot separate the market from price
organized exchange of goods, services, or resources between
buyers and sellers with common interests, within a specific
geographic area and during a given period of time.
you beginning to see how "fair MARKET value" takes
on a different tone when we start applying the definition
of "market". The first question that must be asked,
is "WHAT MARKET"?
example, let's say we have a house that has an ARV of $100,000.
Here we will look at how this same house has different prices
for different markets.
not the ARV imply an end user, or owner occupant market? According
to appraisals, and other "logical" information,
$100k is what this house will sell for, right? Not necessarily.
I have given this as an example of one of the biggest mistakes
that new rehabbers make, which is to take the ARV as the "market"
price they will get for their property. They then become disillusioned
as to why their expertly rehabbed property is not selling.
The mistake they make is not determining "the common
interests within a specific geographical area". In other
words, the neighborhood is predominantly renters and they
are trying to price an owner occupied house in a rental neighborhood.
They have not matched the price with the target market.
take this example a step further, since the ARV of the house
is $100K, and it will take say $20K to get the property in
"marketable" condition, is the house now worth $80K?
If so, to whom? To answer this question, we have to go back
to the definition of "market". To a rehabber the
house might be worth only $50K because after he puts in all
his costs, including holding costs; this will give him the
profit margin he desires. I have heard many who will say if
they bought this house at $50K, they bought it $50K under
market value. This is not true because to a rehabber, his
"market" value is $50K. If you bought it at $40K,
then you bought it $10K under the rehabber's market, and you
will be able to arbitrage the deal.
used the word "arbitrage" to further explain markets,
and why your market has to be defined. "Arbitrage"
means buying in one market then selling simultaneously in
another market to make a profit. Is this not what we call
flipping? You purchase a house from a distressed seller, who
is in one market, and sell it to a buyer who is in another.
the next issue, I will discuss the definition of "market"
further and examine how the element of time alone can affect
of demand, Tom will be repeating his class on owner financing,
on Saturday June 24th and Sunday June 25th, HOW TO GET RICH
WITH NOTES. This class is limited to 20. For under $200, you
will learn what a similar "boot camp" in Austin
teaches that costs thousands. You will also get THE NOTE PROFESSOR
NOTEBOOK as a learning tool. This will be the last time this
course will be offered this year, at this price.
for details. Or call Joele at (972) 671-7346
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