Updated: Jul 6, 2021
One of the most commonly misunderstood concepts in home sales, is Fair Market Value. not only do people struggle to understand what it means, but more importantly, sellers often fail to understand the importance of getting it right the first time. If your initial asking price is too high or too low, it effects the final sales price, regardless of how many times you "adjust" the price. Most critically, when you initially post a $250,000 house for $300,000 and subsequently "adjust" the price back to $250,000, buyers and their agents will immediately assume there is something wrong with the house and stay away. Investors, on the other hand, will swarm for the same reason.
To understand how much your property is worth, you must first understand a basic Real Estate concept called Fair Market Value (FMV). If you’re selling your home, you’ve almost certainly heard of this term. If not, no worries, we’re about to explain it. It’s actually quite a simply concept, though people often try to make it more complicated than it really is. Ready? Here it goes:
Fair Market Value (FMV) = the selling price a buyer is willing to pay for your home.
That’s all there is to it. FMV is what someone is willing to pay. There is no secret formula. Bank appraisals, Competitive Market Analysis (CMA), and Broker Price Opinions (BPO’s) are different ways to guess what the FMV is for any given property based on size, condition, location, and market conditions.
FMV can vary widely, however, depending on who you ask. That’s why there are so many different ways to appraise a property. There are bank appraisals, insurance appraisals, and tax appraisals (to name just a few). Real Estate Brokers and Agents give opinions (called BPO’s and CMA’s) as well.
So which one is right? Well, the key to understanding any given valuation, is determining the point of view of whomever is doing the valuation. You see, contrary to what many believe, value is relative; it is relative to what someone stands to gain or lose. Let’s take a look at the interest, or point of view, of some of the more common valuations you might see.
The bank’s only interest in your property is as collateral for a loan. Their valuation of your home is meant to answer one, and only one, question: “Will the sale of the home generate sufficient proceeds to cover the loan and any costs incurred in the process of repossessing and reselling the property?” That’s it. Thus, a bank’s view of the value of your home is pretty much a matter of Yes or No. Yes, it will cover the loan or No, it will not.
The tax collector, similar to the bank, has a very narrow interest in your property. To the tax office, your property is a revenue generating machine. You pay taxes based on how much they say your house is worth. The amount of tax is based on how much money is needed to run the local government. Tax appraisals are most often, though not always, the absolute lowest valuation you will ever see. Tax appraisals should NEVER be used to determine how much your house is worth as a seller.
When we use the term “buyers,” we are referring to those who are interested in buying property for their own personal use (typically to live in). A buyer’s interest in your property, while specific to any given buyer, is reasonably straight-forward. They compare the benefit of living in the home (eg, proximity to work, schools, shopping) to the cost of owning the home. When determining the value of the house, a buyer is asking questions like, “can I afford this house?” or “what will I have to give up to live here?” A buyer’s valuation is subjective. It is often based on an emotional response to the desirability of the property.
Real Estate Agents:
Real Estate Agents are licensed sales people who either represent the buyer or seller in a real estate transaction. Your agent’s interest in your property is also very simple, s/he will collect a commission which is a percentage of the final sales price. Real Estate agent commission can be quite substantial, depending on the value of your home. Be aware there are two agents collecting commissions on the sale of your home – the Buyer’s and the Seller’s (i.e. yours).
For instance, if you sell your house for $100,000.00 and both the Buyer and Seller collect a 3% commission, YOU will have to pay each of them $3,000.00 (that’s a total of $6,000.00). Thus, the commission is an agent’s only interest in the valuation of your home. The higher the final purchase price, the more money they make and, consequently, the more money you are required to pay them.
These are people who buy, sell, and rent real estate for the purposes of making a profit (either short-term or long). Their interest in your property is also straight forward; they are looking to make the most money they can from buying and then either renting or reselling the property. An investor’s valuation is almost always objective and calculated. Their valuation will be based on the amount of work and time needed to make the property ready to put on the market for rent or resale. They will compare the amount they can make to the price they have to pay for it (called return on investment or ROI). If the ROI is high enough, they will usually buy the property. If not, they will not.
When pricing your home, you should considering the following before setting a price:
Are prices in your neighborhood going up or down?
Are there a lot of new homes being built in your area?
Have roads recently been expanded?
How does your house stack up to others in your neighborhood with regard to things like size, bathrooms, basement, lot size, finishes, etc….
Are there tax changes or other outside influences at work which could impact the price of your property?
As you can see, valuing your property is not a simple thing to do. It requires quite a bit of research and knowledge. Real Estate Sales Agents are licensed professionals trained and experienced in creating Competitive Market Analyses (CMA’s) for your neighborhood. We always recommend consulting with an agent to get a CMA. The CMA is the price most aligned to your interests. An agent will provide you with a suggested sales price close to what a reasonable buyer or investor will offer for your property. This is NOT to say, the agent will always tell you what you want to hear.
Hopefully, this article has helped you understand how your property is valued by different people. If you would like a professional opinion on the value of your home, AS-IS or After Repairs, please contact us now. We’ll be happy to come out to your home and prepare a FREE, No-Obligation Competitive Market Analysis (yes, we’re licensed Real Estate Agents in the state of Georgia).