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Real Estate Design

WHO DETERMINES REAL PROPERTY MARKET VALUE?

 

 

You hear the terms “seller’s market” or “buyer’s market” often in the real estate industry.  A seller’s market indicates control, by the seller, in determining their market value for their homes.  Toronto, as we speak, is under a seller’s market, thus seller’s are in the driver’s seat when it comes to determining market value for their home.  Whether it is one offer or multiple offers, the seller can ultimately control the price they get; on the surface it appears so, but I beg to differ. 

 

I believe that ultimately it’s the buyer who determines market value, no matter what market you are in.  When a real estate market is slow, the economies of scale indicate that there is more supply as apposed to demand.  In a slow market the buyer has more choice, and therefore has more negotiating power.  In this slow market there are no multiple offers and a buyer has time to negotiate his/her deal, and ultimately the buyer accepts a price satisfactory to him/her.  In this market the buyer agrees to buy the home at a negotiated price, thereby establishing market value.  It’s the buyer that agrees to buy a product for such a price.  Without the buyer buying, there would be no sale, thus the buyer sets price. 

 

It gets interesting in a hot seller’s market.  This is the market that all industry professionals deem the seller has control of the price of their home, and therefore sets market value or price.  I believe that in this market, the buyer also sets market value or price.  In this market there is more demand than supply, thus driving prices upwards.  This is true; prices do increase in this market.  But who is the reason for this sharp price inflation we have been seeing?  The answer is the buyer! 

 

There are plenty of multiple offers in this market, especially in Toronto.  I see 10, 20 sometimes 30 offers on properties.  Ultimately the buyer decides to enter into offer competition, and the buyer decides if they want to pay the inflated price.  The buyer once again sets the price and market value for the home.  The seller just puts his/her listing out there.  It’s the buyer that subjectively decides to compete and buy the home, thereby establishing market value.  There are a lot of motivational factors at play with buyers in these market conditions that I will blog about in the future.

 

In this same “sellers market”, I have also seen listings put on the MLS that were supposed to see multiple offers and did not.  Not so much a “seller’s” scenario is it?  Again the buyer analyzed the scenario, felt the property was not worth, and did not put an offer.  Eventually the home will sell at the price the buyer wants to pay, again establishing market value. 

A “seller’s market” means that a seller will see more activity on their homes, and will achieve terms they want; but it is the buyer that agrees to buy and therefore setting market value.

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