Buying a home is one of the most significant decisions, if not the most expensive purchase, people make in their lifetime. This is why buyers want to get an accurate, fair market value of home. At the same time, sellers want the same thing- to get an accurate valuation of the home/property they are selling.
How do you know if you, as a seller or a buyer, are getting the fair market value of what you buy or sell? Determining the fair market value is a process that involves multiple factors to consider.
What is Fair Market Value?
Fair market value is the price at which an asset could be sold in an open and fair market. In real estate, it is the price a seller and buyer agree on when they are free to negotiate. Fair market value is what a buyer would be willing to pay and a seller would be willing to receive for a particular building or property, with both fully informed and acting rationally about the property in question.
The buyer and the seller of real estate will determine how to find fair market value for the property. An appraiser will analyze the transactions and consider factors that will lead to the final sale price.
Aside from buying and selling real estate, fair market value is also used for other financial concerns like calculating a homeowner’s property tax each year, insurance claims, and settling legal disputes, such as divorce settlement or inheritance matters.
How To Calculate Fair Market Value Of A Home
Several things must be considered to determine a home’s fair market value. The same goes true for calculating the fair market value of a business, an antique vase, a family heirloom jewelry, etc.
There is no set formula when it comes to determining the fair market value of a house. The value could go up or down, depending on different factors. Here are some ways to calculate home fair market value:
- Research recent trends in the market for similar homes in the area. This way, you can do a comparative market analysis and get a good idea of what your home is worth.
- Get a home appraisal to determine the property’s market value. A home appraisal will cost you somewhere between $300 to $400, but remember that most lenders usually require an appraisal before approving a mortgage to buy a house.
- Check online real estate sites like Zillow or Trulia to get an idea of the value of your property and similar properties.
What factors influence fair market value?
It’s important to know the fair market value to avoid paying for more than the property is worth. In getting a commercial appraisal, a real estate consultant will consider some factors to determine the fair market value of a property, including the following:
Size, age, and condition of the property/building. The appraiser will look into the building’s total area and essential components like plumbing, cooling and heating systems, roof, etc. A home that needs repairs will be worth less than a home that’s in good condition. These will all be factored in how to calculate fair market value.
Location. Location is always a big thing in determining the fair market value of a building. Properties closer to public transportation and the center of commercial activities will always have a higher market value.
Income Potential. The potential of a property to generate income from rental is another factor that weighs in on the fair market value. This means that buildings or properties with several spaces available as rental potential will have higher market value than properties without possible rental spaces.
Current market condition. If other similar properties are available, this will negatively impact the fair market value, and your home may sell for less. On the contrary, a limited inventory of properties in the area will increase the fair market value house potential.
It’s important to remember that fair market value is not set in stone. Depending on the housing market and the local economy, it can go up or down. Understanding the fair market value is vital for a seller to help you determine if the list price is too high, too low, or just about right. As a buyer, you will know what to offer when you are ready to buy your dream house.