How Do You Determine Fair Market Value Of A House

This is an issue that crosses almost every home owner, home buyer and real estate investor at one point. The fair market value (FMV) of a property is the estimated price at which it would sell in an open and competitive market, knowledge of real estate values can serve as a foundation for estimating that value because there is room for interpretation given trends in any particular city or neighborhood. Having an understanding of your home’s FMV helps give you the confidence to make better decisions, whether you’re purchasing, selling, refinancing or investing in real estate.

In this process, we’re going to explain what fair market value really is and why it’s so important in professional ways to determine FMV.

What Is Fair Market Value (and Why It’s Important)

The fair market value of an item is the price you would get if you were to sell it on the open market that day; it’s also the price you’d pay for that same item bought from the seller who gave you that quote.

And this one is especially crucial in:

• Real estate transactions: when prices are being set, or offers are being made
  
  

• Mortgages and appraisals: Lenders need to know they’re getting what they’re paying for.
  
  

• Taxation: for the calculation of property taxes or capital gains
  
  

• Estate planning/Insurance: to effectively determine a realistic replacement value
  
  

In the field of construction quantity takeoff, having a systematic process is essential to accurately measure and evaluate the materials, upgrades, and site improvements that contribute to a property’s overall value.

Key Ways To Calculate Fair Market Value

There is no one “magic number.” Instead, researchers employ various techniques to cross-angle toward the best guess.

Here’s the most common and effective methods:

1:Comparable Sales Method (Sales Approach)

This method is standard/daily business for appraisers and real estate agents.

You

Steps:

• Identify 3-5 comparable homes recently sold in the same neighborhood.
  
  

• Same size, age, condition and features are best
  
  

• Ideally same
  
  

• Add a differential (+$5,000 per additional bathroom)
  
  

This method is only as good as the market data it uses, so it’s no better than its sources.

Pros:

• Reflects recent buyer behavior
  
  

• Easy to justify
  
  

Cons:

• In fast-moving markets, comparable sales may become outdated quickly
  
  

• Adjustments can be subjective

2:Income Capitalization Approach

This method is most often used with rental and other income-generating property.

Formula:
Value = NOI ÷ Cap Rate

Example:
If an investment property nets you $12,000 per year and the average cap rate is 6%, then:

Value = 12,000 ÷ 0.06 = $200,000

Pros:

• More agnostic, based on true income (predictions)
  
  

• Works well for casino or multiple unit property opportunity
  
  

Cons:

• Needs good predictions for input measures
  
  

• Cap rates vary by market
  
  

3:Cost Approach

This approach is to determine what it would cost to replace the building (depreciated) + value of land.

You’d take current construction costs and subtract how much the structure has depreciated in value via wear and tear and then add in what the land’s worth.

Pros:

• Works well when few similar sales are available
  
  

• Strong method for new or custom-built homes
  
  

Cons:

• Difficult to justify accurate estimates of depreciation
  
  

• Not always consistent with market values
  
  

Performs Best by Combining Methods into an Estimate

Savvy real property appraisers often use more than one approach and reconcile the results for a better opinion of FMV.

For instance:

• Anchoring with the sales comparison approach
  
  

• Cross-reference with income approach if its an investment property
  
  

• Use cost approach as a maximum or sanity test
  
  

The middle one of these is the most equitable estimate.

Market Value Drivers

Either way, you will want to keep in mind this handy dandy check list of critical variables:

Location & Neighbourhood

Proximity to schools, transit and shopping all play a role in driving market value; noise and views (both good and not so good) are also key factors; safety ratings; etc.

Size & Layout

Square footage, number of bedrooms and bathrooms, how the floor plan functions, it matters.

Age & Condition

A brand-new roof or updated plumbing pushes value higher; structural issues or dated finishes lower the bar.

Upgrades & Amenities

Pools, sleek new kitchens, solar panels or smart home features can all bring added value, if they appeal to a local buyer base.

Market Trends & Demand

Maybe your prices are going through the roof. And if demand is rising in your area (low supply, high job growth) then prices may rise. Oversaturation or economic down trending can, however, push prices lower.

Zoning, Restrictions & Land Use

What can be built and how it will affect the value can be limited by permitted-use ordinances, setbacks from property lines, environmental concerns or easements.

Economic Factors

Valuations are constantly shifting with interest rates, credit (mortgage) availability, inflation,and the overall big picture economy.

How To Do This

How would you do this

Gather information

• MLS listings
  
  

• County records
  
  

• Online real estate sites
  
  

Select comparables

• Recent
  
  

• Close
  
  

• Same
  
  

• Add or subtract to account for differences (features and condition, location, lot size)
  
  

Test income (when applicable)

• Project rent
  
  

• Vacancy rate
  
  

• Operating expenses
  
  

Estimated cost

• Research the local rate of construction costs
  
  

• Cut off value for depreciation
  
  

Weigh results

• Add outputs
  
  

• Prune outliers
  
  

• Convert sum to final count
  
  

Notice

• Make a note of the reasons behind your assumptions
  
  

• Use a bona fide appraiser as a checkpoint, if possible, particularly on high-profile transactions
  
  

Tips to Prevent Common Stumbles

• Don’t put too much stock in online estimators
  
  

• Beware of stale data
  
  

• Pricey upgrades may not bring full return
  
  

• Ignoring bad inspections can be value killers
  
  

• Emotional bias: You could over value your home emotionally,buttress with objective data instead
  
  

Let’s Add the Power Word + Emotional Hook

For homes and homeowners and buyers, feeling safe and secure is something we all desire. These are the ultimate words in valuing peace of mind. But getting it wrong can wreak havoc on your finances.

Example (One real-world story)

Now imagine you own a suburban home.

• House A sold for $400,000
  
  

• House B, smaller than A but still much like yours, sold for $380,000
  
  

• House C was larger than houses A and B but older, and went for $420,000
  
  

You make your adjustments, include land value, and come to $395,000 comparison of sales.

The income approach gets you $385,000, since it’s rented part time.
Your cost approach suggests $410,000.

Sales is the category that carries the most weight, a little bit for cost and income combined, and you end up with a fair market value of $395,000 in your determination.

Conclusion

How To Find The Fair Market Value Of A House? That’s more than a guessing game, but an educated guess that combines comparable sales and income potential, and cost estimates.

Location, upgrades, condition, the price can be shaped by many market and economic factors.

Some mixture of methods and an unbiased approach will give you a reasonable estimate.

Frequently Asked Questions

Q: How often should I recheck the real estate market value of my house?

A: We suggest once every 2-3 years but in the case of fast markets it may need to be done more often.

Q: What kinds of errors are there in the FMV estimates?

A: Virtually all lay estimates fall areola in a 5 to 10% range. Errors come from bad apples on the list, not considering depreciation or failing to factor in market momentum.

Q: Can the fair market value be used for tax appeals?

 A: Yes, if your municipality has an appeals process, you can file a formal valuation document and include a paper trail negating the assessment of higher value.

Q: I always just assume that my valuation wins with the lender.

A: Not always. If your logic is strong but your analysis gets undone by some unlikely turn of events, interest rates head in the wrong direction, or occupancy can’t be pumped up, lenders typically want that underpinning estimate to have come from a licensed appraiser