When buying a home, you will eventually encounter the phrase “fair market value.” This is one of the most important concepts to understand when making an offer on a house. The amount you offer should be based on current market conditions and trends.
So how do you determine the fair market value of a home? Where does this number come from? Is it the same as the asking price? Does it come from a home appraisal?
These are some of the most frequently asked questions about real estate market values. In this tutorial, we will answer all of these questions and more. Let’s start by defining this term.
Definition: The fair market value of a home is a reasonable price based on current market trends and conditions. It is the price at which the home will sell in a reasonable amount of time. The fair market value is based on recent and comparable sales in the area, or “comps.” It is a product of supply and demand.
Now let’s talk about what it is not. The fair market value of a home is not based on the assessed value of the property. The assessed value comes from the tax assessor’s office, and is assigned for taxation purposes only. Market values, on the other hand, are based on the forces of supply and demand within the local area. They are determined by what people are willing to pay in the current market.
How to Determine Fair Market Value for a House
So, how do you determine the fair market value of a home before making an offer? The best way to do this is by examining recent sales data in the same area where the subject house is located.
You can get a general idea what a particular home is worth by seeing what similar properties have sold for recently. This is what real estate agents refer to as comps. If you’re using a real estate agent to buy a house, he or she should help you determine the fair market value based on comparable sales in the area. This is one of the agent’s most important responsibilities when it comes time to make an offer.
Let’s say I’m in the market for a one-story, ranch-style house in a particular neighborhood of Santa Rosa, California. I need three bedrooms and two bathrooms, with about 1,500 square feet of space. I go onto Realtor.com, Zillow, and other listing websites to see what similar homes have sold for recently.
Within the last couple of months, most of the properties in my desired location with my desired features have sold for $375,000 to $390,000. I have just determined the fair market value for the type of house I am seeking. I could also find a home that I like first, and then determine the fair market value based on comparable sales. Either way, the steps are the same.
Not Exactly the Same as Appraised Value
The fair market price is also different from the appraised value. They may overlap, but they are two different things. Here’s the key difference between them:
- The appraised price is the result of a professional home appraisal conducted by a licensed appraiser. It is one person’s opinion.
- The fair market value, on the other hand, can be determined by anyone who has access to local market data.
I can determine the fair market value of a house simply by evaluating recent sales on Realtor.com, Zillow or Trulia. But I cannot issue an appraised value for a home, because I am not a licensed appraiser.
These two values might be based on the same data (and they usually are), but they are still two different things. As a home buyer, it’s important that you understand these differences and similarities.
Definitely Not the Same as the Asking Price
When you make an offer to buy a house, it should be based on the fair market value of the property. The offer should be influenced by current conditions, recent sales, and supply and demand. It should not be based on the seller’s asking price. At least not entirely.
Consider the difference:
- Some sellers conduct plenty of due diligence when setting their prices. They evaluate the comparable sales we talked about earlier to determine what their homes might be worth in the current market. This is the smart and sensible way to go about it.
- Other sellers set their asking prices based on the amount they currently owe on their mortgage, or the amount they paid for the home when they first purchased it. This is the wrong way to go about.
As a buyer, you have to take the seller’s asking price with a grain of salt. Step 1: Determine the fair market value of the home by researching comparable sales in the area. Step 2: Make an offer based on your extensive research. Step 3: Negotiate as needed.