What is market value?

One homeowner found out the hard way that his renovations did little to increase the value of his property. By his calculations, his property was worth the amount he paid for it plus the costs of improvements. But, when he listed his home for sale according to this formula, no one was willing to pay the price. The market had declined since he purchased the property. So even though he had improved it at considerable expense, his home sold for less than he paid for it. To keep from making this mistake, it's important to understand the distinction between market value and cost. The market value is the most probable price a property will command if it's exposed on the open market for a reasonable period of time, assuming that both buyer and seller are well-informed and neither party is acting under undue pressure.

The market value may or may not be equal to the amount it cost to build the property. Even in a new home development, where similar homes cost the same amount to build, you'll find a variation in market value depending on such factors as whether or not a home has a view or is located on a busy street. A view, for example, usually adds value to a property. And buyers generally pay less for a home that's located on a busy street. The location on a busy street lowers the value of the property.

Before you make substantial improvements to a property, find out if the improvements will add market value. For example, you may be considering putting in a pool at a cost of about $20,000. If you lived in a warm climate and your home was the only one in the neighborhood that doesn't have a pool, this is probably a good investment. If you don't add a pool, a future buyer will probably discount the value of your home because it lacks a pool. However, since here in New Hampshire, pools aren't considered an asset, you may invest a lot of money and discover that your improvements actually decrease the value of the home. Large yards with lawns and gardens might carry a higher value.

The market value of a property is in part determined by the law of supply and demand. When there are plenty of homes for sale, and few buyers, the market value of your home may decline. When the inventory of homes for sale is low and buyer demand is high, market values often rise. So the market value of your home will change over time depending on market conditions. The cost to build or replace a home will also change over time. When the costs of labor and materials rise, so will the replacement cost of your home. It's important to keep track of the replacement cost value of your home to make sure that you're adequately insured. To determine the replacement cost, multiply the square footage of your home by what it costs to build per square foot in your area. A local contractor can provide you with the cost per square foot.

To determine the current market value of your home, inquire about a complimentary Market Analysis.

Copyright 1998-2005 Dian Hymer. Distributed by Inman News Features