What is Market Value? - Definition & Overview

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

What is something worth? How is price determined? Is price the same as value? In this lesson, you'll learn about market value and how it is determined. You'll also have an opportunity to reinforce your knowledge with a short quiz.

Definition

Market value is the highest price that a willing buyer will pay for a good or service and the lowest price at which a willing seller will sell it if both the buyer and seller have all the relevant information concerning the purchase and the good or service has been exposed to the market for a reasonable time.

Market Value is Not Market Price

Market value is usually different than market price. The market value of a good or service is the price that would be paid for it in a fair market. A market must meet certain requirements for it to be a fair market:

  • No distress. Neither the seller nor the buyer is distressed. In other words, the buyer doesn't have to buy, and the seller doesn't have to purchase. A person with no water who is approached by a water vendor in a desert is a distressed buyer. A seller who faces bankruptcy if he doesn't make the sale is a distressed seller.
  • Adequate information and market exposure. The seller must have adequate time to search for potential purchasers and the buyer must have sufficient time to research and compare alternatives.
  • Negotiated price. The purchase price is established through negotiation and mutual agreement rather forced upon either the buyer and seller. It's possible that the price set by the seller is already the price agreeable to the buyer.

If you make a purchase of a good or service in a fair market under the above conditions, then, and only then, will the market price you paid equal the market value of the good or service. As you might have guessed, a fair market doesn't always exist.

Example

Imagine you are purchasing a house. You have a home and are not in a particular rush; you are just upgrading. You have lived in your city for about ten years and have targeted your desired neighborhood. You have researched the real estate market in your city and the neighborhood and are familiar with the houses on the market and off the market and the sales history over the past year. You've also hired an experienced real estate broker to represent you. After reviewing over a dozen houses in your target area and having your real estate broker conduct a comparative analysis of similar houses in the area, you are ready to present an offer.

Now, let's head over to the seller for a moment. The seller is a construction company that has built the house as a spec home. The developer is a custom builder who builds several spec homes in various subdivisions around the city. It's in great financial health and is an expert in the market. It receives your offer and while it's not insulted, based upon its knowledge of the comps in the area, it rejects your offer. The seller does send you over a counteroffer.

You review the counteroffer. You're not really surprised that the seller rejected your offer, but you were hoping it was a motivated seller and would take a low offer. You meet with your real estate agent and instruct her to reject the counteroffer. However, you present a new counter-offer that is about one percent below what comps in the area are selling for.

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