Why is fair market value important when buying or selling in Mexico? Those of us living in Mexico from other parts of North America probably take the concept of fair market value for granted. We assume that this measure of value is used in other markets and other countries. Actually, it is 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 must be available.
If we start out with the objective to have fair market value, where, do we as consumers normally go? There are no websites as in Canada and the United State, such as Zillow and Trulia, offering a large number of properties for sale as well as average sales prices by areas. Until AMPI, our local professional organization for those in real estate, contracted with a third-party vendor of MLS systems, 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.
The classic definition of fair market value is the amount for which real or personal property is sold in a voluntary transaction between a buyer and seller, neither of whom is under any obligation to buy or sell.
If the buyer and seller are not informed through public means, they rely on real estate professionals or appraisals to help determine value based on sales data of similar properties or properties adjusted for differences.
Commerce, as we know it, works efficiently and to the benefit of the whole, if information is shared. Controlling prices comes when a few have information to the detriment of the many. It is unconscionable when a seller or his agent keep market information from a buyer and sell them a property at an exaggerated price.
Knowing the fair market value in a real estate market enables buyer and seller to have control. Knowing FMV can help price a home for sale, negotiate a purchase price or 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. Adjustment can be made for differences in size, location and condition of a property.
2. Market Trends affect FMV. Low demand versus high demand affects price, as well as high inventory versus low inventory.
3. Particular conditions also have an impact. If properties have mortgages or there are defaults with the lender taking the properties back, the listed properties may be offered at a much lower price to move inventory. Builders also can compete against an individual seller who wants to re-sell his/her real estate within their development.
4. Comparative Market Analysis is a common way to determine a property FMV. For it to be a valid CMA, there must be sufficient information on sold properties and their characteristics in addition to price, such as condition, location, debt, etc.
5. Appraisals describe 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 in their reports the comparables, or sold prices. Traditional appraisals are to find FMV from market value, replacement cost and income.
AMPI is continuing to learn and become more proficient with its Flex Multiple Listing System. As AMPI agents become more knowledgeable and proficient, FMV will be a measuring stick.
This article is based upon legal opinions, current practices and my personal experiences. I recommend that each potential buyer or seller of real estate conduct his/her own due diligence and review.