Solving mystery of fair market value

REThink Real Estate

By Inman News Feed
Add Comment Add Comment | Comments: 2 | Posted Oct. 28, 2010

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REThink Real Estate

Tara-Nicholle Nelson
Inman News

Q: I am a single woman and first-time homebuyer. I am totally new to all this. I found a property I like and it appears the selling price is matched up to the tax base value. If I want to make an offer, where/how do I find out the true "market value"? I do not want to insult the owners, but at the same time I want a good deal.

How does one find out what the fair market value of a house is? Is it in the MLS data or at the county court house?

A: Fair market value is the holy grail of real estate mysteries. It is nebulous, slippery and always changing, and actually only able to be estimated except at a precise point in time when the stars align and a set of conditions exists, which arise only a few times in the life of a property.

First things first -- here's what fair market value is not. In most cases, it's not the same as the tax assessor's value or assessment. It is rarely found in the multiple listing service information (although most listing agents will argue that the list price is near or below the fair market value), nor in a file at the county courthouse.

That's because the definition of a home's fair market value is the price a qualified buyer would pay for the home in an open-market, arm's-length transaction between strangers. I'd argue that this is the case when the property has been well-marketed, listed with an MLS, a buyer's broker commission has been offered, and a buyer who is both willing and able to buy the home comes forward and makes an offer to buy it (though listing a property with broker representation and in an MLS isn't essential to meet the definition of "fair market value").

The price of the best such offer in such a situation? That's the fair market value of the home.

So, that means that the fair market value is not necessarily the listing price, although it may be. It also means there's no rule of thumb about how much above or below the listing price the fair market value may be. Sometimes the assessor's value comes close to the fair market value, especially when the home has been sold or assessed fairly recently. However, there is a way to estimate a home's fair market value, and that is to analyze the recent comparable sales data.

If this sounds like what you think a home appraiser does, that's because it is. If you're not buying a home or otherwise engaged in a decision that warrants paying $500 for a formal appraisal, you can also do this yourself or in partnership with your real estate broker or agent.

What you need is the sales prices of three to five recently sold homes in close proximity to the home you're trying to value. The closer in time and geography, the better. Also, the more similar the homes are, the better.

Once upon a time the standard practice was to look at homes within a one-mile radius that had sold within the last six months; on today's volatile market, you'd do best to look at what homes have sold for in the last couple of weeks or months.

Keep in mind that you're looking at the prices these homes sold at -- not the list prices. The listing prices of homes that have not been sold can be informative -- especially if they are very similar and have lagged on the market a long time, which can educate you about what value is too high for the home -- but to pin down an actual value estimate, you'll want to look at the prices of closed sales, which are public in most places. Where do you get this information?

Many real estate listing websites offer this sales data (although the estimated values some offer vary widely in accuracy), and virtually every real estate agent would be happy to help a prospective buyer or seller conduct a comparative market analysis to help determine a home's fair market value, especially in the context of deciding what price to set or offer for a home.

Once you have the sales data, you'll want to mimic an appraiser by deciding how comparable the comparable homes actually are, and adjusting your estimated value of the home at issue upward if it is bigger and/or better than the comparable homes, and vice versa.

This can get somewhat tricky to do, and the process can be corrupted if you have subjective motives or biases, like you really want the place to be cheaper, or it's your home and you subconsciously (or consciously) want to list it much higher.

For this reason, and because you may not be able to make objective, accurate decisions about how much to adjust your estimate of the home's value upwards or downwards based on its differences from the comparable homes, I'd encourage you to work with a local real estate agent familiar with the neighborhood to pin down an estimated value.

If you have trouble finding one, or you are at a stage where you don't want to connect with an agent just yet, there are many online discussion forums and communities where local agents will chime in and help you get a reality check as to the value of a home.

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1. Lee Lucky Tabas said... on Oct 29, 2010 at 11:04AM

“Good rental units are hard to find .”

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2. Mike Peris said... on Nov 11, 2010 at 10:39AM

“I disagree with Lucky.”

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