Street Value has a profound influence on Market Value and ultimately acquiring property below market. Understanding value is an important step in obtaining profitable listings and selling property at aggressively low prices. Fair market value (FMV) is an estimate of the market value of a property, based on what a knowledgeable, willing, and “unpressured” buyer would probably pay to a knowledgeable, willing, and “unpressured” seller in the market. The 7D Theory seeks out buyers and sellers who are distressed. Which changes the method of how we use value to obtain Below Market Pricing. Street Value is the most probable price a buyer will pay when property perception, condition, supply, demand, competition and economic conditions are considered. During negotiations Street Value takes precedent over Market Value. Fair Market Value should always be considered in the appraisal process. However, appraisers and realtors that evaluate for the bank tend to marginalize or de-emphasize street value. Understanding this mistake opens an opportunity for buyers.
Property Condition Example
If a home has a severe defect like Aspergellic Mold or Chinese Drywall there would need to be a condition adjustment made downward to price. These patent and latent defects must be remediated by removing the drywall completely back to the studs. The potential buyer would be purchasing a home with this liability. Appraisers have a difficult time justifying dollar amounts for the liability. Moreover, most appraisers aren’t contractors so they have trouble understanding what is necessary to fully remediate / repair a property to a safe and marketable condition. An appraiser is paid to estimate value not to provide remediation quotes and will normally not invest time or money in verifying remediation prices. Thirdly, banks understand that investors who purchase defective property and take on this liability don’t do it for free. Investors expect to make a profit. Appraisers generally aren’t realtors so they don’t know the buyers profit or Return on Income (ROI) expectation. My experience is that realtors do not invest enough time and research into their Broker Price Opinions (BPO’s). No offense but most realtors do not have anywhere close to the expertise of appraisers to properly evaluate property. In Florida, the average residential MLS listing is overvalued between 2% to 5% above its closing price. The reason a realtor’s appraisal poor appraisal doesn’t become an issue is because most buyers are required to make down payments between 3.5% to 5%. So a property only has to appraise between 95% – 96.5% of it’s value. So the buyer doesn’t realize they are really over paying. Most bank Real Estate Owned property or REO’s are overpriced because prices are being dictated by bank loss severity equations as opposed to market value.
Street Value is important because these adjustments such as condition, supply, economic condition, demand and perception allow downward adjustments on price. There is additional profit in the difference between what an investor can remediate / remodel for versus the retail cost of the project. Once that is added to the investor profit it assures the property can be negotiated significantly below market value. Most appraisers may disagree with some of my assertions of “street value” however the banks don’t!