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Fair Market Value of a Home

(A continuation of How to Sell a House)

By - 2006

To figure the fair market value of a home on your own, you need to use comparable sales, often referred to by real estate agents as "comps." This is how appraisers and good real estate agents do it. Comps are recently sold similar homes near your home. The more recent, the closer and the more similar, the better.

Find at least three similar homes nearby that have sold within the last six or maybe twelve months. These will be your comps. This information is in county records, which are sometimes online now. A real estate agent with access to the multiple listing service will also have this data, at least for homes that were listed with realtors in the area (which is usually most of them).

Here is the information you need to collect for each property:

1. The price it sold at (not the asking price).

2. Special terms, like low-interest seller financing.

3. Address. It should be within a half mile, but the same neighborhood is preferable.

4. Style. Mobile homes don't compare well to brick houses, but sometimes you take what you can get.

5. Total square footage.

6. Number of bedrooms.

7. Number of bathrooms.

8. Does it have a basement?

9. Does it have a dining room?

10. How big are the bedrooms?

11. Does it have a family room.

12. Does it have a laundry room?

13. How big is the kitchen?

14. What appliances were included?

15. Is the lot much bigger or smaller than normal?

16. Are there any decks?

17. Is the landscaping much better or worse than normal?

18. Is the driveway paved, gravel or dirt?

19. Is there a garage or carport? How large?

20. Is the interior up to date?

21. What is the general condition of the home?

22. Note anything else that may affect the value (like a pool, bad roof, fireplace, being next to train tracks. etc.)

Obviously you have to guess on some of these things. That is what appraisers do, no matter what they tell you. They guess better of course, because of experience. When you are not sure about something, like the condition of the interior, for example, just assume it is the same as your home, unless your home is way above or below average.

Take your first comp, write down the selling price, and review the description item by item. Add to the sales price of the comparable for each thing it doesn't have that your subject home has, and subtract for each thing it has that your subject home does have. This sounds confusing, but it will make sense in a moment.

For example, if your home has a second bathroom, and the comp doesn't, add the value of the bathroom to the sales price of the comp. If the comparable sold home has a blacktop driveway, and your's doesn't, take the value away. You'll have to estimate what these things are worth, or ask for professional help.

You are rectifying differences, to see what the comparable home would have (or should have) sold for if it was just like yours. Here is a simplified example:

Your Home:

Address: 215 Oak
Style: two story
Square footage: 1600
Bedrooms: 3
Bathrooms: 2
Garage
Driveway: gravel
Kitchen: updated

Comp #1:

Sold for: $242,000
Address: 417 Oak (no adjustment)
Style: two story (no adjustment)
Square footage: 1760 (- $20,800)
Bedrooms: 3 (no adjustment)
Bathrooms: 1 (+ $15,000)
Garage: carport (+ $15,000)
Driveway: asphalt (- $5,000)
Kitchen: updated, small (+ $5,000)

Make additions and subtractions from the $242,000 price it sold for and you get an adjusted value of $251,200.

Explanation of the chart:

- Same general neighborhood and styles, so no differences there.

- The comp has 160 square feet more, and for the sake of this example, we will assume that the average price per square foot in the area is $130 (ask a real estate agent or figure an average from recent sales). 160 times $130 is $20,800. To make the home like yours, you have to subtract this.

- Same number of bedrooms.

- The comp has one less bathroom than your home, so we add $15,000 for the bathroom, again to see what the comparable would have sold for if it was just like your home.

- A two-car garage adds about $15,000 more to a home value than a carport (we'll guess), so we add $15,000 to the sales price of the comp.

- An asphalt driveway probably adds about $5,000 in value to the comp, versus your home, so we subtract this.
- A small kitchen in the comp probably knocks $5,000 off the value, so we add that back on. Once again, this is how we make it as much like your home as we can.

Now, adjusting the comp to see what it would likely have sold for if it was like your home, we arrive at an adjusted price of $251,200. That's the actual sales price plus $20,800, plus $15,000, plus $15,000, minus $5,000 and plus $5,000.

Do this with each comp, then average the adjusted prices. For example:

Comp # 1 : Adjusted sales price $251,200

Comp # 2 : Adjusted sales price $261,800

Comp # 3 : Adjusted sales price $247,000

Comp # 4 : Adjusted sales price $238,800

Now, adding $251,200, $261,800, $247,000, and $238,800, we get $998,800. Divide this by four, and we get an average adjusted sales price of $249,700. This is the indicated value, or in other words, the best estimate we have of the fair market value of the home.

Of course there are a lot of guesses here, as there always are. Read on for more about pricing...

The book continues: How to Find the Value of a Home - A few final thoughts and useful tools.


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Houses Under Fifty Thousand | Fair Market Value of a Home