Fair Market Value is the price the house would sell for on the open market, is the price that would be negotiated between a home seller and a buyer who has no personal relationship.
It determines how much a person can write off on their taxes when they donate a house to charity, how much the government must pay homeowners when it seizes their property through “eminent domain” for public benefits.
Real Estate property valuation is a topic of interest for stakeholders for a variety of reasons.
Assessors value properties for tax purposes; Investors like to know the purchase price of the property in which they are going to invest; Other purposes include bank lending, accounting reports, and insurance.
The most common method of determining the fair market value of real estate is to use comparable sales.
The appraiser compares the house to nearby properties of similar size and quality that have sold recently, adjusting the price according to any factors that might increase or decrease the value of the home that’s being appraised.
For investment properties, the appraiser also takes into account the ROI, or how much income the property produces.
Finally, an appraiser can try to calculate “replacement value” and then subtract from that any noticeable deterioration of the existing structure.
Often appraisers will use a combination of approaches to reach an estimate.
Factors that Increase or Decrease the Value of Property:
Location: its proximity to quality schools, retail stores, parks, grocery stores, restaurants, transportation, and nightlife. Many homebuyers wish to invest in a home that’s within walking distance of entertainment and recreation and in a school district that would afford their children quality education.
“Location” also extends to the actual view from the home and the quality of neighborhood with low crime rates.
Size: Most homebuyers want spacious homes, but bear in mind that more square footage can result in additional maintenance expenses. Homes that fall in that middle ground of “just right” tend to be more valuable.
Layouts: homes with open layouts typically have higher values than those that have more walls and feel closed off. Homes with fewer but larger rooms are considered more valuable than their counterparts with additional but smaller rooms.
Property’s age, lot size, number of bedrooms and bathrooms, type of heating system, amenities and overall condition are also important factors. A home in poor condition will have a lower value than a well-maintained property.
Improvement: Upgrades and adding landscaping can add to the value of a home. However, homeowners can sometimes spend too much on improvements and fail to realize the full value of those renovations when it comes time to sell the property.
Please seek the advice of a real estate professional before investing in home improvements in order to assure the smartest use of the dollars spent to repair and upgrade a home.
Demand: local builder activity, zoning restrictions, and land use regulations have a big impact on the supply of new homes and affect the demand for new and existing residential properties.
Noise or light pollution, air quality, internet availability, traffic congestion, road quality, access to government services or hospitals are also factors that cause values to be different.
Mortgage interest rates have an enormous impact on home values, can drive up property prices by as much as 25% by altering the perceived affordability.
Low-interest rates and limited inventory have created an ideal environment for home sellers in some parts of the county.
How much we pay for property tax is decided by the assessor’s property value. What’s an assessor’s view on the fair market value?
“Assessor Prang on Calculating the Fair Market Value of a Home
The fair market value of a residential property can be calculated by comparing the recent sale prices of similar homes in the neighborhood.
Utilizing the services of a professional home appraiser is the most accurate way of calculating the fair market value of a home. However, it is possible to crunch the numbers without hiring an appraisal service by analyzing the sale prices of similar homes that have sold in the prior 6 months in the same neighborhood.
Understand the Features that Drive Value
Valuing a home is not an exact science, but professional home appraisers take a number of key features into consideration when determining a home’s fair market value. These include the property’s age, lot size, internal square footage, the number of bedrooms and bathrooms, type of heating system, amenities and overall condition. Location is critical. Homes in a neighborhood with low crime rates and better transportation links tend to have a higher value than homes in which lack these features. The first step is to look at the property with an appraiser’s eye and write down its principal features.
Check Out the Neighborhood
Researching similar homes for sale in the neighborhood can give a good indication of how much a home might be worth. Use property websites such as Trulia, Zillow, or Redfin to look up properties that are roughly the same size, construction, age, and style as the property being valued and have the same number of rooms, layout, and other features. Make a note of how quickly these homes sold and at what price. Ideally, four or five comparable homes (or “comps”) that have sold or been listed 6 months prior are needed to ascertain a fair market value.
Figure Out the Rate per Square Foot
For each of the comps, divide the selling price by the property’s square footage. To determine the price per square foot (or PPSF). Find the average value of these homes by adding the PPSF
figures together and dividing by the number of comps used. For instance, suppose the following comps are used:
- Property A is 2000 square feet and sold for $420,000. The PPSF is $210.
- Property B is 2200 square feet and sold for $480,000. The PPSF is $218.
- Property C is 1900 square feet and sold for $390,000. The PPSF is $205.
- Property D is 2000 square feet and sold for $475,000. The PPSF is $237.
The average price per square foot is thus $217. Multiply this figure by the square footage of the home being valued to get an idea of its fair market value.
Consider Special Qualities of the Home
While the PPSF gives a baseline valuation, it does not take into account the unique characteristics that could raise or lower a home’s value. Upgrades such as a new bathroom, kitchen, or siding tend to add value; conversely, it’s likely that a home in poor condition will have a lower value than a well-maintained property. There’s usually a wide variety in prices per square foot based on these factors. Ultimately, it is up to the homeowner to decide whether a home is worth more or less than the average PPSF in the neighborhood.
Go Down the Traditional Route
To sense-check figures, ask a real estate professional to run a comparable market analysis. This detailed report is similar to the analysis above, but a real estate agent has access to more comprehensive selling data such as available properties, pending properties, expired properties, and typical days on the market. This data should translate to a more accurate valuation report. For a definitive valuation, contact a professional home appraiser. Home appraisers undergo 150 hours of classroom education and gain 2000 hours of experience before they are licensed to value properties. They are the only professionals that banks and lenders rely on to provide opinions of a home’s fair market value.