While you can’t put a price on the memories you made in your home, the house itself will get a certain value assigned when you sell it. This price is often rooted in the fair market value for your house. But what is fair market value? How is it different from market value or appraised value? And how is fair market value determined for your house?
Multiple factors determine the fair market value, and every property is different. Just like a jigsaw puzzle has many pieces, the fair market value for your house is influenced by many pieces of information that shows its total value when compared to other homes.
Fair market value and appraised value are estimates of a property’s value in a free market. Consumers and economic factors can influence the fair market value, and the fair market value indicates a selling price. Experts estimate the appraised value of a property to determine its worth. The fair market value and appraised value are not always the same.
Before we can discuss how an investor determines fair market value for your house we need to define what it is. Then we can look at the factors that influence an investor’s offer.
What is Fair Market Value?
The fair market value of a home, which is based on the price a potential buyer would be willing to pay for it, is an important factor for both sellers and buyers.
“Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.” –The official definition used by the Internal Revenue Service
Putting it another way, fair market value doesn’t automatically signify the value of a house. Instead, it denotes the estimated amount of money a buyer and seller would likely agree upon through negotiations and under normal conditions.
It’s important not to confuse fair market value with market value and appraised value. All three can be related to the task of defining the worth of a property, but fair market value is what it should sell for.
Keep in mind that the appraised value of a house could be higher or lower than its fair market value. This is because it’s an objective valuation of a home by an appraisal professional, while fair market value is simply what a buyer is willing to pay for the property.
Determining Fair Market Value
In a real estate transaction, fair market value is typically determined by taking the value of three or more comparable homes that have recently sold and calculating an average. Because of this, a house’s listing price doesn’t always equal its fair market value. Unfortunately, sellers are known to frequently misprice their house believing it to be worth more than the market will bear.
Appraisers sometimes use what’s called the cost approach to determine fair market value, particularly when the house is unique and there aren’t many houses to compare it to. In this technique, an appraiser considers the previous sale price of the lot and estimates the cost of construction to replace the home on the property, factoring in depreciation and subtracting that from the value.
A third, more infrequently used technique is known as income capitalization. This method is usually reserved for income or rental properties, and is based on how much income can be generated from the home.
Now that you know how fair market value for a house is determined, let’s take a look at the other factors that an investor considers.
Fair Market Value to an Investor
When an investor determines Fair Market Value for your house they will take some other factors into consideration before making an offer. Some of these are:
- Is the property in distressed condition?
- Does the house need to be updated (electrical, plumbing, appliances, etc.)?
- Is the property in foreclosure?
- Are you underwater on your mortgage?
- Are there tax liens on the property?
- If it’s a rental property, are there non-paying tenants?
All of these factors represent financial costs that the investor will have to make in order for the property to be resold or rented. As such, they will affect the fair market value for your house and impact an investor’s offer.
Reasons Why a House Might Not Sell for Fair Market Value
There are a number of reasons why a house sells above or below its fair market value. For instance, if a homeowner is facing an expensive family medical emergency and can’t make their mortgage payment, or they need cash immediately to pay hospital bills, that is not a normal or typical selling condition. In such a case, the owner might sell the house below its fair market value.
Essentially, if either party is reacting to outside pressures such as medical emergency, loss of a job, pending foreclosure, unpaid tax bills, or death in the family while buying or selling a home, then the home’s price point might drift away from its fair market value.
An Example of Fair Market Value
The fair market value is the price a buyer and seller agree on if both have reasonable knowledge of relevant facts and there are no external factors. For example, if a seller lists a home for $350,000 and an interested buyer offers $300,000, and the buyer and seller negotiate and agree on the purchase price of $310,000, that is the fair market value.
In the case of selling to an investor, a fair market value for that same $350,000 house might be $275,000. This is due to a wide range of factors including:
- The investor is offering to buy your house without you making needed updates
- The house you’re selling has fire or water damage that the investor will have to repair
- You need to close quickly and don’t want to pay real estate commissions and fees
- You want to avoid foreclosure or are already in pre-foreclosure
The seller must remember that the investor needs a reasonable expectation of turning a profit, after making any necessary repairs and upgrades, or they cannot do the deal. All this being said, many sellers who work with an investor, instead of a realtor, still walk away with as much cash without the hassle of dealing with a real estate agent, marketing the property, having multiple showings, and having the house take significantly longer to sell.
It is always the goal of an ethical investor to submit a fair, competitive offer on a property as it stands. That’s how we do business at Black Girls Buy Houses. If you want to learn more about us, or want to get a fair market value offer from us, let’s connect!