How do you determine the fair market value?
Technically speaking, the fair market value is the price a property is actually worth. This price can be determined by comparing it with the actual sold price of similar properties using square footage, age, construction, number of bedrooms, bathrooms, and other amenities, etc. A fair market value is what a particular property should sell for in a reasonable period of time when exposed to qualified buyers. A fair market value is usually not the price being asked by the owner or realtor.
How do you determine the fair market value? Establish all of the following information.
- Cultivate Realtors: Realtors have easy access to recent information on the sale of properties. Building a relationship with a realtor(s) can enable you to obtain MLS (Multiple Listing Service) information, property and tax data, comparables and a whole host of other information. When using comparables, you will need:
*Number of bedrooms
*Number of baths
*Finished or unfinished basement or crawl space
*Days on the market
*Original listing price
Other helpful information may include: amenities, distance from subject property, type of construction, taxes, school district and builder.
Use these items to calculate the price per square foot, apply that factor to the square footage of the subject property and that is the fair market value.
You may wonder why a realtor would want to provide this information. It’s simple, if you made the right approach; it would be to their benefit. Informing them that you are a real estate investor and have financial partners that pay cash for properties will usually get their attention. If you make your request after that statement and further explain that not every property you research will meet the necessary criteria, but you will be glad to refer those to the realtor for possible listing, sale and commission. The odds are that the realtor will be happy to work with you.
Utilize Appraisals: Appraisals conducted within the last six to 12 months can give an indication of the fair market value – as of the day of the appraisal. As a current appraisal, it can also be an excellent source for comparables and value.
Tax Assessor’s Office: Within the County Courthouse is the Tax Assessor’s office. In some cases you will need to know the parcel number, not just the property address or owner’s name, to find the assessed value. The assessed value is also known as the property tax value, this is different from the fair market value. The assessment ratio varies from state to state, therefore, ask someone in the Assessor’s Office what ratio is used to determine property value.
Property is assessed at differing percentages of value according to type of property or its use.
The statutes provide that all property improved by a structure, which is used or intended to be used as a residence, and has four or fewer living units, is to be classified as residential. Apartments with more than four units are commercial. Agricultural property must be devoted primarily to raising crops, livestock, dairying, etc.
Real property is assessed on an every-other-year basis, with values placed on the tax rolls each odd-numbered year. Physical changes made to property can be reflected on the tax rolls in even numbered years; changes due to market conditions may not be.
Property value based upon county assessment is around 85 – 90% percent of the fair market value. Property values are estimated since it is virtually impossible to physically inspect every property on an annual basis. An estimate is made and adjusted for inflation or cost of living. Thus, once you know the ratio or factor used, you can approximate the property value.
Example: (in the State of MO for real property)
*Assessed Value: $17,100
*Assessment Ratio: (.19) 19%
*Property Value $90,000
$90,000 property value divided by 90% will equal a fair market value of $100,000.
Neighborhood Drives: This preliminary analysis or comparison allows you the opportunity to review neighborhoods conducive to quick property resells. Look for Realtor for Sale signs and For Sale by Owner signs. Then you can telephone the owner/agent and acquire more details. From there, you will be able to determine if the property is comparable to your subject property. This is also a good way to check out the type of neighborhood.