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Why is Fair Market Value Important for Real Estate in Mexico?

Terrace view from home in Puerto Vallarta, Mexico
Credit: Harriet Murray

Why is fair market value important for real estate in Mexico? If you are from other parts of North America, you probably take the concept of fair market value for granted.

We just assume this measure of value is used in other markets and other countries, but it is actually not common outside of the U.S. or Canada to have sold market data. In order to have information about sales prices and to adjust for differences in properties, data needs to be available.

How do you find fair market value information in Mexico? There are no websites like Zillow and Trulia, which show a large number of properties for sale and also show average sales prices by areas. We can’t check the public records or see sales prices printed in newspapers.

Until nine years ago, there was no genuine multiple listing system for AMPI agents as a group to collect data effectively to advise a buyer or seller on fair market value.

You should also know that some people use fair value and market value interchangeably, but there is a difference between these two terms. Fair value is the price at which an asset is exchanged between knowledgeable parties as an arm’s length transaction. Market value is the price at which the asset is exchanged between parties in the market.

If the buyer and seller are not informed through the open market, they rely on real estate professionals or appraisals to help determine value based on sales data of similar properties or properties adjusted for differences.

The real estate business works efficiently and to the benefit of the whole if information is shared. Controlled prices come when just a few have information to the detriment of the many. It is unconscionable when a seller or his/her agent keep market information from a buyer and then sell them a property 100 or 200 percent over its fair market value. The reverse, of course, can also be true. An incompetent appraisal of property value can cause a seller to sell their property too low.

The issue is control. Knowing the fair market value in a real estate market enables buyer and seller to have control. Knowing fair market value can help price a home for sale, negotiate a purchase price of a property for sale and resolve an estate or divorce settlement.

Here are a few factors that help determine fair market value:

1. Comparable solds within a certain time frame help determine the subject property value.

2. Adjustment can be made for differences in size, location and condition of a property.

3. Market trends affect fair market value. Low demand versus high demand affects price, as well as high inventory versus low inventory.

4. Particular conditions can also influence fair market value. Bad publicity about crime or health issues can really affect prices. Builders also can compete against an individual seller who wants to re-sell his/her real estate within their development.

5. Comparative market analysis is a common way to determine a property’s fair market value. For it to be a valid comparative market analysis, there must be sufficient information on sold properties and their characteristics in addition to price, such as condition, location, debt, etc. It amazes me to see experienced agents use “expired,” ‘’off the market” and “active” sales prices mixed in a competitive market analysis. This is contradictory and misleading information which can manipulate fair market value.

It makes sense to evaluate how many listings have expired and see if this is related to price, condition, location or other factors. A good comparative market analysis report shows an estimated value based on adjusted solds. Separately, it is also important to include relevant active properties to assess the competition and to know where the property you are evaluating falls into the mix.

6. Appraisals use measurements and improvements to a property as well as allowable uses through zoning and permits. Appraisals are usually done by engineers or appraisers who also consider comparables or sold prices. But be sure that an appraiser understands that location of properties to each other is very relevant, not locations far away from each other. Also, understand that they should not to use active properties mixed with sold.

7. Traditional appraisals find fair market value from: market value, replacement cost and income.

As agents who belong to AMPI, our local real estate professional organization, become more knowledgeable and proficient, fair market value for real estate transactions in Mexico will become more refined.