What's the Difference Between Market Value and Market Price?

How are values estimated? How do sellers know what to ask for their property (assuming no bank is knocking on the door)? How do buyers come up with a price that they are willing to pay for a property?

Given the lack of deals in the market place today, there is growing confusion about what constitutes 'market value' vs. 'market price'.

One is an estimate of price and one IS the price.

Where there are no, or very few, transactions taking place it becomes very difficult to estimate values. And, where buyers have an expectation (that may or may not be based in reality) that there should be a lot of 'good deals' out there because of the Great Recession, I'm seeing more people grasping for what real values should be.

Market Value is defined by the Ontario Real Estate Association (OREA) as:
“The highest price in terms of money, which the property will bring to a willing seller if exposed for sale on the open market; allowing a reasonable time to find a willing purchaser, buying with the knowledge of all the uses to which it is adapted and for which it can be legally used, and with neither party acting under necessity, compulsion or peculiar and special circumstances.”

A couple of provisos, also from the OREA:
“Market Value is not to be confused with market price: the amount paid, or to be paid, for a property in a particular transaction. Market price is an accomplished or historic fact. Market price tends to closely align with market value in an efficient marketing system involving willing, informed buyers and sellers, given reasonable periods of time with no undue influences. However, successive market prices, in comparable properties form the basis of estimating the market value of a particular property.

Market Value is not to be confused with cost. Expending $2,000,000 in constructing a new development plus $500,000 for the purchase of the land in no way ensures a market value of $2,500,000. However, assuming a reasonably efficient market, the difference between actual cost and market value may be negligible unless obsolescence was built into the property or intervening factors affect the market place: e.g., lack of housing, supply, dynamic growth in a particular market, extremely depressed market conditions etc.”

A lack of 'successive market prices' is the problem facing sellers and buyers today. And, as time goes by, it gets harder and harder to nail down values because more and more time is slipping away. As time goes by, historical data becomes less valuable and therefore the process is exacerbated.

So what is a buyer or seller to do? Let common sense prevail. Where an investment property has solid tenancies and shows promise of long term returns along with cash flow today, why wait to sell or invest? Now is the time to make smart investments. The cost of inaction is just too high.

Source: OREA Real Estate Encyclopedia, Premier Edition, 1997


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