Saturday, February 05, 2005

More Than One Way To Determine Fair Market Value

What is the fair market value (FMV) of your home? The quick and easy answer is: whatever a seller can get a buyer to pay for it. When real estate agents vie for a listing, they will present comparative market analyses (CMA) to help the seller determine a fair price. The CMA helps determine an asking price, but the real value of a house is the final price paid by the buyer. An appraiser determines a home's value compared to other area sales of that particular home style and the lenders will base their loan amounts on those appraisals.

Meanwhile, there are three ways of determining the value of a property when it comes to putting your home on the market: the CMA, square footage value and tax assessment formulae.

The CMA is by far the most popular means used by agents. It's a straight forward way of determining value and works best in a subdivision environment where additions or alterations on the homes have not created an eclectic housing environment. If you have four or five basic models in the community, it's a relatively straight forward process to derive an asking price.

For instance, if the New Squire model (4 bedrooms, 2 baths, carport on a quarter-acre lot) is selling for an average of $315,000 then that's probably the best price or value you'll be able to determine for your property. If the market is heading upward or downward, you may need to talk with your agent to determine which way to lead your asking price.

The challenge with this pricing model occurs when the community ages and owners begin to close in carports, bump out and up the space, finish basements and alter the original floor plans of the houses. Once that happens, the agent has to investigate further to determine if the New Squire models that sold for $315,000, $320,000 and $325,000 last month indeed had the same floor plan, amenities and features, to provide an apples to apples comparison.

When the homes no longer resemble the original construction or you live in a community that is not a subdivision, then you'll need to look at the average price per square foot. The agent researches all the aspects of your property and constructs a list of homes comparable to your home throughout the area to arrive at an average cost per square foot.

Thus, while you're looking at homes in neighboring subdivisions or communities, the square footage for a particular style of home can be determined -- then you would multiply your square footage by that factor.

For example: your 1,600-square-foot ranch home in the community averages $125 per square foot, thus the asking price would be $200,000. Again -- all the factors of the community, amenities and features would be taken into account to make sure the comparison is true -- so that the ranch homes you're comparing also have the same number of bedrooms, baths, fireplaces, decking, etc. Obviously, not all ranches in your community are created equal and these disparate conditions and locations would have to be taken into account.

When I priced a golf course home with two levels, I had to take into account the owner also had installed a genuine wine cellar, a two-level living room with automatic drape openers, a three-car garage, and a completely new addition for a game room and extra guest bedroom suite. There were no homes in the neighborhood to match this target property. I had to find homes in the neighboring communities on golf courses to determine a price.

It's when you run into this type of problem that you would want to consider a tax assessment means of determining price/value.

The good thing about this methodology is that it doesn't matter what type of amenities, square footage or model of home you have, the formula works throughout the neighborhood or community.

In essence you take the average tax assessment of a community and the average sales price in the community divided into each other to determine a multiple factor. For instance, if the last 10 sales in the community averaged $312,000 and the average tax assessment equaled $275,000, then you would divide the sale price by the tax assessment to determine your multiplier -- which would be 1.13.

Thus, take the tax assessment of any target home in the neighborhood and use the 1.13 multiplier to determine the fair market value, e.g., a tax assessment of $175,000 would result in an asking price of $197,750.

These three methods are obviously very simplified for the space in this column; however, they provide you with an idea of how to determine FMV for your property (for rough estimates). The best way to determine value, of course, is by using the professionals.

Published: January 21, 2005

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