People often believe that home values when set by sales prices are a fair representation of the Fair Market Value of the home. Reasons often relating to market drivers and references to Adam Smith seem to lend credence to the argument but when examined under a fine microscope you find the opposite to be true.
Fair Market Value is not defined by the sales price of a home. The sales price is the wildest variable in the equation and only represents the current financial, emotional and personal situation of the home seller at that moment in time. Homes are sold for pennies on the dollar in certain circumstances and for more than their value in others. That is what Adam Smith was referring to....
A homes Fair Market Value is defined as it should be by a professional appraiser. I am a strong proponent of the Fair Market Value Sales Theory for Real Estate and will define that more in later blogs.
Now what is the positive effect that DPA's and specifically "Earned Income" DPA's like The Buyers Account, DP Funder and DP Now programs? Nothing much unless you live in the neighborhood. You see, when a home sells for less than the Fair Market Value it artificially lowers the values of the homes around it.
Homes only sell for less than the Fair Market Value when the seller's particular situation dictate that he sell his property before he wait long enough to receive its Fair Market Value. Sellers use many methods to enhance their homes for a quicker sale. Lowering their price is the "Old Standard" way of enhancing their homes for sale but as we see from above that can actually hurt your home, neighbors and neighborhood.
With Earned Income programs your seller can sell the home they need to sell while helping a buyer purchase a home with substantial equity and a mortgage that they can afford while not negatively effecting local values.
