How to Determine Fair Market Value
(A continuation of How
to Sell a House)
By Steve Gillman - 2006
To understand how to determine fair market value when selling
your home, it helps to realize that you are not part of the market
of buyers. So if you ask "How much is my house worth?"
I have two answers for you. First, if you don't really need to
sell it, it is worth whatever you say it is. If you can honestly
say, "I wouldn't sell this house for less than $300,000,"
then it is worth that much to you. Of course, if you need to
sell it, what it is worth to you is entirely irrelevant.
Fair market value is the only relevant value once you are
ready to sell. This is the value according to all the home buyers
out there. They don't care what you spent renovating the house,
or what you originally paid. Spend $50,000 adding a pool, and
they may only pay $20,000 more for the home. Real estate is worth
what the market says it is worth.
Another True Story
I once did a comparative market analysis for a young couple
who were getting ready to sell their home. After I looked over
the home and took my notes, I promised to return the next day.
I carefully dug through the "sold" books (this was
before everything was computerized) and found nearby homes that
had sold within the last six months or so. I did all the work
that I had to do, and came up with a market value of $115,000.
"$115,000!" They blurted out in unison. I was sitting
with them at their kitchen table, and I had all the papers with
me. I showed them the "comps;" the listing information
on homes that had sold. I felt that I did my homework well.
"But we paid $90,000 for the house two years ago and
last year we put $40,000 into remodeling the kitchen!" they
told me.
Having perhaps a bit less tact than I have now, I politely
explained that I took the kitchen into account. The kitchen was
lovely, I assured them, and their $40,000 investment had probably
raised the value of the home by $10,000. A market analysis, which
is a shorter version of a formal appraisal, just doesn't take
into account the desires or feeling or expenditures of sellers.
They chose not to list with me. What normally happens in a
case like this is they find a real estate agent with lots of
patience or little business. That agent agrees to list the home
for too much, hoping that one day the sellers will get desperate
to sell, finally face reality, lower the price and take their
lumps.
Market Value
What is real estate value? It isn't what you have into your
house. It isn't what you feel it is worth. It is what the market
will pay. How do you figure out what the market will pay? There
are three basic ways that appraisers use to determine the value
of real estate. They are income analysis, replacement cost analysis,
and market analysis using comparable sales (also called a CMA,
"comparative market analysis).
Income analysis is used for income properties. Investors don't
care as much about what features an apartment building has as
they do about its net income. This method isn't relevant to finding
the value of a single family home.
Figuring replacement cost isn't very useful either. It's difficult
to say what land is worth in a city center where none is left
for sale, for example, and tough to gauge depreciation of the
home itself. Valuation from replacement cost is used as a secondary
method, and for unique homes that can't be compared easily with
others.
The primary method of real estate appraisal used for homes
is a market analysis using comparable sales. A basic description
of this process is: look at similar homes nearby to see what
they have sold for. Your home will sell for something similar.
For a more detailed explanation of how to determine fair market
value, read on...
The book continues here: Fair
Market Value of a Home - The basic market analysis process.
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