HOW TO DETERMINE MARKET VALUE OF A PROPERTY
In real estate, it’s important to know the trends in the market and what your potential property is worth. Market value and fair market value are terms that are often used with real estate whether you are a seller, buyer, or investor. Regardless of your role, knowledge of how to determine market value of a property is essential for success.
Market value is extremely important when we look at investing in real estate. Whether you are just starting the process and doing research or you have found a property and want to invest, having an understanding of what market value is makes a big difference
What is Fair Market Value?
Simply put, fair market value is the determined value of an asset based on its likely sales price to a buyer. A property’s fair market value is the amount of money you can reasonably expect your property to sell for if you were to sell it that day under normal conditions. How to determine market value of a property varies depending on specific variables. Normal conditions imply that you are selling your property under a normal time frame, not rushed or due to extenuating circumstances. Fair market value also helps you to understand how much equity you have in your home and the investment strength of the property.
How you determine fair market value of a property can fluctuate depending on different factors. For example, a property located in a popular area will have a higher fair market value because of the higher demand. If you are trying to sell a property out of necessity because of a divorce or death, then you may get a different amount than the fair market value.
Normally, we think that fair market value is based on comparable properties in the neighborhood, but that’s not always the case. Fair market value isn’t solely based on comparable properties in the area or neighborhood. Fair market value also takes into account what the free market will pay for the property.
It’s also important to understand the different, yet similar-sounding, terms in real estate investing. Fair market value is different from market value and appraised value and it is commonly used for tax purposes as well as the real estate market. Market value is not the same as the market price, which could be higher or lower depending on the variables.
To learn more about the basics of real estate investing check out our blog “12 Easy Steps to Take Before You Begin Investing in Real Estate.”
Methods for Determining Market Value
Online Comparative Valuation Tools
There are many ways how to determine market value of a property. If you are looking for a quick estimation of the market value, you can use an online comparative valuation tool such as Zillow’s Zestimate or CoStar. Online tools, however, can be far from accurate and are not always up to date with the market trends and what is happening in the area. Specifically, online estimate tools are not always accurate, as the user can enter false information that skews results and does not accurately reflect the property in its current state.
For best results, be realistic about the area, the condition of the property and any upgrades that may have been made to the property over time.
Review Your Latest Tax Assessment
Your most recent tax assessment will give you a starting point for the market value of your property. If you don’t have a copy of your assessment but you know how much you pay in taxes per year and the tax rate, you can calculate the assessed value. The assessed value will give you a good idea of the market value of the property in question. To calculate the assessed value of the property, find out the percentage of property tax you pay yearly and divide the yearly tax by that rate.
Get an Appraisal
A professional appraisal of the property can help you determine the it’s value, what it could sell for, and what any property upgrades have done for its value in the long run. An appraisal can cost anywhere from $300 to $1,000, with the rate generally being higher for larger, more expensive properties.
For a more thorough estimate, hire a few appraisers. If you use this method, you can either go with the middle valuation or take an average of the appraisals you received. Just make sure you hire a trusted appraiser who knows your area and comes highly recommended.
Run a Comparative Analysis
A Comparative Market Analysis, or CMA, is another tool often used by real estate professionals to determine how the property stacks up in the area compared to others. Since fair market value takes other comparable properties into consideration, this is a good way to get started in the process of determining a property’s value. The comparative market analysis will match the property to comparable properties in the local market and create a statistical breakdown of what the property may be worth in comparison to other comparable properties with matching or similar features.
How To Determine Market Value of a Property – Like Yours
The sales comparison approach is frequently used to determine an estimated market value of a property. This method can be suitable for certain types of properties, both commercial and residential, but it isn’t perfect in every situation. This approach takes a look at a property’s features and compares them with other similar properties and what they have sold for in the local market.
First, make note of the different features of your property. The primary features you should consider are square footage, bedrooms, bathrooms, lot size, location, age, and the overall condition of the property.
Second, it’s time to find comparable properties that have similar features to your property that have sold within the last three to six months. It’s important that these comparable properties be in the same neighborhood or market area as your property to get an accurate picture of the value of your property. When you are looking for comparable properties, try to find ones that are in the same condition as your property as well including upgrades and updating. Make a note of any differences in the features, especially square footage or a number of bedrooms and bathrooms.
Then, run a quick calculation to get a benchmark valuation for the property. To do this, figure out the average sales price for the comparable properties you found. You can also get a pretty goo estimate by calculating the price per square foot average in the market area and determine the value of your property based on that figure. This is useful especially when the property is bigger or smaller than your property.
FREE PDF DOWNLOAD: How to Accurately Determine the Market Value of a Property
How to determine market value of a property can be more art than science. There are no exact rules or calculations, as there are many factors that come into play. It’s important to keep this in mind when you are looking at other properties and their features. Maybe one was smaller, but it had a view – this could increase its value despite your property being bigger and possibly having nicer features. This is why it helps to have an experienced real estate professional or appraiser help determine the market value of a property so you have a better grasp on the value of your property in the market.
→ If the property in question is a rental property and generates an income, check out this article to learn more about valuations using CAP rate.
Other Factors That Affect Market Value
There are a number of factors outside of your property’s features that can impact its market value. For example, supply and demand also plays a role in the valuation of a property and the area it is in. If the property is in a good neighborhood with high demand surrounded by good schools and transportation, it may be valued higher than a property that is further away, has a longer commute, and is in a neighborhood that’s not as high in demand. When a neighborhood or area has a booming market, the supply and demand of properties available can significantly affect the value of a home and what that home can go for in rent or sales price.
Market values are primarily driven by the area the property is in and the property’s square footage. The nicer finishes do help it sell or rent better, but they don’t drastically affect the market value of the home as much as people think that it does. An amenity such as a pool may be an in-demand feature for some people but a detractor for others. It’s hard to know what amenities and features people will value. This is where it can get tricky to determine the market value of a property, as it is very subjective.
When you are exploring how to determine market value of a property, it’s important to do your homework and to be realistic about the property and where it compares to other properties on the market in your area. Market value isn’t personal and for many, homes hold a personal attachment for us.
Supply and demand can play a role in the value and ending sales price of a home as well. A property may be well above appraised value by the time it sells if the market is hot and buyers are really wanting to get into a specific area. It’s also important to remember that the market price of a home isn’t the same as what it can be listed for to sell.
More from Veloce Capital
Knowing the basics of property valuation can help you make the best choice for your real estate investments. At Veloce Capital, we’re here to help as you take the first steps into real estate investing. We’ll help you set up an entire plan that works for you from start to finish. For more information please email us at firstname.lastname@example.org.
Ross, Sean. “How the Real Estate Market Determines the Value of a Property.” Investopedia, Investopedia, 15 June 2020, www.investopedia.com/ask/answers/072915/how-market-value-determined-real-estate-market.asp.