One of the biggest problems you face in obtaining top dollar for your property is determining your house's value. The problem of determining value occurs primarily because sellers and buyers alike use 3 (little) words - price, cost, and value interchangeably. A lack of understanding regarding the meaning of these words and their use causes communication breakdowns and allows emotion to replace objectivity during price negotiations. The fact is, neither cost nor price is the same as value.

Value is elusive. It is your opinion of your house's worth to you based on the way you use it now and plan to use it in the future. Interesting - the words “you” and “your” both appear twice in the preceding sentence. Because your opinion is subjective, the features you value may not be the standard for all people.

Two factors affect value:

(1) Internal

Your personal (internal) situation is the first factor and it changes over time. Let's illustrate - suppose you were a growing family buying their present house 15 years ago. You would most likely have put great value on such things as 4 bedrooms, a huge fenced yard and a great school system. But now, 15 years later, your family is grown and have their own homes. You don't need 4 bedrooms, a huge yard or that terrific school system. The house didn't change - your personal (internal) use for that house did. Thus, it's value to you changed. It's the internal factors in people's lives that compel them to buy and sell property.

(2) External

These are the circumstances outside of your control that affect values and they also change - sometimes for better, sometimes for worse. If, for instance, a major 8 lane toll road is proposed to cut through your neighborhood, your property value could take a hit. On the other hand, if a Light Rail Station is coming to your neighborhood, that could decrease your commute to work from 1 hour to 20 minutes, your value may increase. The law of supply and demand is a huge external factor that affects value. If there are more buyers than houses, the values go up. If more people want to sell than there are buyers, values go down.

Cost is history. Cost measures past expenditures. But that was then and this is now. What you paid for your house then or the cost of maintaining it doesn't mean anything as far as the present or future value of your house is concerned.

Why? Because markets can and do change dramatically. Unfortunately, many sellers realize little to no profit upon selling. Some even lost money. Your potential profit or loss as a seller doesn't enter into the equation when determining your house's present value.

Price is here and now. You put an asking price on your house. The buyer puts an offering price in their offer. You and the buyer negotiate back and forth until you arrive at a mutually acceptable purchase price. Today's purchase price becomes tomorrow's cost.

Remember, cost is past, price is present, and value is in the eye of the beholder. Neither the price you paid or the price you want to get matters to the buyer. Not understanding this often causes sellers to make a very common mistake - overpricing.

FAIR MARKET VALUE

Fair market value is the price that a buyer will pay and A seller will accept for a house - given that neither buyer or seller is under duress. Duress comes from life changes (birth, death, divorce, financial reversal) that puts buyers or sellers under pressure to perform quickly. When alerted that a sale was made under duress, appraisers will raise or lower the sales price accordingly to reflect the house's true market value.

Fair market value is far more powerful than just value. Remember, values are opinions. You, the seller, have an opinion of what your house is worth. The buyer will have another. The two won't necessarily be equal. Value is opinion, not fact. Conversely, fair market value is fact. It becomes fact the moment you and the buyer agree on a mutually acceptable price.

WHAT FAIR MARKET VALUE IS NOT?

Fair market value is not need-based pricing. Don't confuse the word “fair” with equitable. Despite its name, there is nothing fair about it. It is often brutally impartial and often cruel. Need is not a component of fair market value. None of the following matter one bit:

The amount of money you need since that's how much you paid when you bought

The amount you need to pay off your mortgage's)

The amount you need to buy another house

The amount you need to replace the money you spent fixing it up

** Here's why need doesn't determine fair market value **

Two houses, identical size, floor plan, condition, location. One was purchased 15 years ago for $65,000, the other was purchased 5 years ago for $155,000. Shortly after the second property was purchased, property values declined about 5% and fair market value remained there. Today, they both sell and because both houses are identical, they both sell for $147,250. Now, the owner who bought at $65,000 made a sizeable profit. The second owner barely made enough to pay off the mortgage and expenses. He needed more - but did he get it? NO! Fair? NO! What about the first owner? Fair? He thinks so! Lesson: fair market value is utterly unbiased. It is the amount your house is worth in the market today - not the amount you or the buyer would like it to be.