The fair market value of your home is used by mortgage lenders to determine how much they are willing to lend on your property. You can also use it to determine a price if you are thinking of selling.
Fair market value of your home is the price another person would pay today to buy your home.
How is Fair Market Value Calculated?
A real estate appraisal is the only way to determine the fair market value for your home. What the appraiser does is research homes sold recently which are the same, or almost the same, as yours. Then, they take into consideration upgrades or any downgrades.
These are things like upgrades to kitchens or bathrooms, landscaping, etc. which are all good for your value. Maybe your home is on a busy street whereas the others that sold are not and that would hurt your value.
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Then, they come up with a fair market value for your home based on this information. For more information on the appraisal process especially when getting a mortgage read this.
You may have put in some upgrades and think the value would include the cost of those. But that is not how it works and I talk about upgrades in depth in the article mortgage appraisals above so be sure to check that out.
Homes are selling in your neighborhood for a certain amount and you naturally assume it means your home has that same value. However, they may not be your same home. Remember, it has to be a home the same as yours…same style, number of bedrooms, bathrooms, etc.
Let’s say a foreclosure home sold that is the same as yours recently. And it sold for less because it was a foreclosure. That home has to be included in the calculation. Which will bring your value down.
You may have an idea about the value of your home but then the appraiser comes in and it turns out to be different. When values are going down, which is what they’ve been doing since all the mortgage mess, it stings as a homeowner to find out your value is not what the appraiser comes up with.
Quicken Loans has a Home Value Index that tracks what you as the homeowner thinks your home is valued at and what the appraiser thinks is the value.
“In Quicken Loans’ groundbreaking Home Price Perception Index (HPPI), appraisers’ opinions of home values in October were 1.58 percent higher than homeowners’, according to the national composite. Appraisers’ and homeowners’ opinions are more in agreement compared to September 2014, when appraisers valued homes 1.62 percent higher than homeowners estimated. Although in October 2013, the span was significantly closer, showing only a 0.83 percent discrepancy.
“While everyone would like to be pleasantly surprised to find that appraisers think their home is worth more than they thought, in reality, it is best for homeowner estimates to be as close as possible to appraiser estimates,” Walters explained. “The closer together the appraiser and homeowner opinions are, the more homeowners are understanding what is happening to their local housing market. Whether homeowners are looking to sell soon, hoping to refinance or applying for a home equity loan – there are many benefits to understanding the current home value trends in their area.””
To read more about Quicken click here.
Fair Market Value of Home for Taxes
Your county calculates a value for your home in order to determine the amount of property taxes you will pay. The information they use is usually lagging so it’s not a good indicator of what the current value is. The higher the tax assessed value of your home, the higher your property taxes are.
I found an interesting article about what different homeowners pay for property taxes.
“The report found that homeowners who have owned five to 15 years had the highest effective property tax rates while those who have owned more than 20 years had the lowest effective property tax rates. The average effective property tax rate was 1.35 percent for homeowners who have owned between 10 and 15 years, and it was 1.34 percent for homeowners who have owned between 5 and 10 years. Meanwhile, the average effective property tax rate was 1.18 percent for homeowners who have owned less than 1 year, and it was 1.15 percent for homeowners who have owned more than 20 years”
And it also found higher tax amounts for high end homes which makes sense but also for low end homes. To read the whole report click here.
I think people get wrapped up into what they paid for an asset instead of what another person would pay to purchase that asset…right now.
I watch a show one time about people in a divorce trying to divide up the assets. Of course they are fighting over assets…which is why they need a mediator. The mediator then has appraisers come in and put a fair market value on the things they are fighting over.
And inevitably, one person thinks they paid a little for something and it went up in value. And another thinks they paid a lot for something and it is still worth what they paid.
But what happened many times is the asset they paid a little for is still worth only a little and the asset they paid a lot for is not worth anything close to what they paid.
And yet they are fighting over value that isn’t there.
It’s all in your perception.
Your home is the biggest asset you have. Of course you will be passionate about how much it’s worth. The good news is the real estate market can determine a fair market value quite easily because homes are bought and sold every day.
Determining the Fair Market Value of Your Home
In order to determine the fair market value of your home, you need property sales data for homes similar to yours. Zillow is one place you can get an idea of what your home is worth.
But just a word of caution, Zillow or any other real estate website can give you an idea of value but an appraisal is really the only way to determine the value.
If you are buying or going through a refinance, the appraisal will be a part of the mortgage conditions. If you are thinking of selling, it would be smart to shell out $300 or $400 for an appraisal. Then, there is no guessing.
One more word of caution. Real estate appraisers are also humans. One may be better than another, one may be more conservative than another, one may have missed something, one may include or leave out pieces of information another would not.
I guess what I’m trying to say is a real estate appraisal is just as much art as it is science. But even with this component, the overwhelming bulk of determining the fair market value for your home will come down to what homes similar to yours sold for recently.
I hope this helps and good luck!
The Mortgage Insider
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Author: The Mortgage Insider
