Prior to making a home purchase, it is crucial to "run the numbers." This involves objectively considering a property by examining data and calculations. While it may not help you decide on the paint color or the shower fixtures, running the numbers can determine whether or not you're making a sound financial choice. One aspect of running the numbers is analyzing the historic fair market value, as it provides insights into a home's value growth over time and its potential for future growth. Here's a guide on how to find and analyze historic fair market value.
Understanding Different Types of Home Valuation
Before diving into the details of finding historic fair market value, it's essential to comprehend the different types of home valuation. While these terms are interconnected, each has its own sourcing and usage.
1. Historic Cost
The historic cost of a home refers to the actual price paid during previous sales transactions. This information can be obtained from the local county courthouse, which keeps records of home sales prices whenever a property changes ownership.
2. Fair Market Value
Fair market value (FMV) is the estimated amount a home would sell for under current market conditions. It represents the price that an informed and willing buyer would pay, and an informed and willing seller would accept.
Fair market value is greatly influenced by supply and demand. In a "seller's market," the fair market value rises, while in a "buyer's market," it declines. Real estate agents determine fair market value by conducting a comparative market analysis (CMA) that looks at recent sales of similar homes. It can fluctuate based on factors buyers find desirable, such as views, amenities, and upgrades.
3. Appraised Value
The appraised value is an objective determination of a property's worth. Trained real estate appraisers consider the home's features, condition, and recent nearby sales. They add or subtract value based on similarities or differences between the property and comparable homes.
Although fair market value and appraised value can be similar since both consider comparable homes, appraised value relies on formulas and multipliers instead of subjective preferences and market demand. Mortgage companies require appraised value for loan considerations. In a hot seller's market, buyers may need to provide cash for the difference between the fair market value and appraised value at closing to secure their dream home.
4. Assessed Value
The assessed value is used solely for calculating property taxes. It is determined by a government-appointed property assessor who applies a preset ratio or percentage to the fair market value. In some cases, the assessor may conduct a visual inspection of the property. The assessed value is generally lower than the fair market value.
The Importance of Fair Market Value
Among the four valuation methods mentioned above, fair market value holds the most significance for buyers and sellers during a sale as it influences the list price and negotiations. If the asking price exceeds the perceived fair market value, the property should have renovations and updates supporting the pricing. Otherwise, buyers may consider negotiations to be unfeasible. Conversely, if the asking price is lower than the market value, buyers may suspect some kind of distress associated with the property.
Fair market value is also important for other purposes, such as insurance claims, property donations, and estate taxes. It is advisable for homeowners to keep tabs on their property's fair market value even after the initial purchase.
While homeowners should also consider appraised value and assessed value, fair market value often informs these values, making it the primary reference point for real estate valuation.
The Intersection of Historical Cost and Fair Market Value
Buyers, especially investors, often examine the historic fair market value of a property to gauge its appreciation potential. Analyzing a property's long-term valuation trend can provide confidence in its investment value.
The historic cost of a home can be easily obtained through public records. However, tracking the historic cost may not provide the most accurate data for determining true value. For instance, a homeowner may sell the property to a family member for a nominal fee, which has no relevance to its value. Similarly, selling the property to settle a mortgage balance without considering any equity gains does not reflect its true worth. In both cases, the sale is recorded, but the cost does not indicate the property's actual value.
Investors seeking a better indicator of a property's worth should consider the historic fair market value. Obtaining this information requires going beyond public records of historic costs and conducting additional research.
How to Find the Historic Fair Market Value of a Home
To determine the historic fair market price of a home, consider the following four information sources:
1. Consult Online Tools
Online platforms provide a preliminary look at historic fair market values. These sites can be a good starting point, but their calculations may not always align perfectly with reality.
- Realtor.com: Enter the property address into the search bar on Realtor.com and scroll down to find a graph depicting Realtor's valuations over the years. While these fair market value calculations rely on an algorithm sometimes questioned by local real estate agents, they offer an initial perspective.
- Zillow.com: After entering the property address on Zillow.com, you will find a 10-year Zestimate history, which represents Zillow's version of fair market value. They also provide information on the comparable homes used for valuation, offering a point of reference.
- Neighborhood Scout: This pay-to-play tool is designed for investors seeking detailed reports to make informed decisions. It includes data on appreciation history and forecasts, as well as comparative analysis against neighborhood and national trends.
- FHFA Housing Price Calculator: While this tool doesn't provide historic fair market value, it utilizes local appreciation data to project future home worth, which is likely the ultimate goal.
2. Work With a Real Estate Agent
If you have consulted multiple online sources, you may notice similar trends but with different specific figures. A local real estate agent can help pinpoint a more accurate historic fair market value by interpreting the gathered valuation data.
Real estate agents closely monitor popular search tools like Realtor.com and Zillow.com to stay updated on market numbers. While they may not fully trust these numbers, they understand that their clients rely on them. An agent's local expertise can provide a more precise historic valuation.
Real estate agents also have access to historic data in the MLS (multiple listing service) and can retrieve those reports for you.
3. Check Sales Prices and Tax Assessments
Although historic cost and assessed value do not equate to fair market value, knowing these figures provides a well-rounded view of valuation. Both the historic cost and assessed value can usually be found through a simple internet search. Compare them to the fair market data collected from online sources and your agent to gain additional insights into the home's history.
4. Order a Home Appraisal
While appraised value differs from fair market value, the two valuations complement each other. Therefore, an appraiser can provide valuable insights into historical and future valuation.
Appraisers compare property features, including square footage, bedrooms, bathrooms, renovations, and condition, within the same real estate market. They also consider appreciation and pending sales, especially in rapidly appreciating conditions. Although appraisers do not deal directly with fair market value, their training in home valuation allows them to offer insights into historical values. During the appraisal process, ask about their choice of comparables and their thoughts on historical values in the area, neighborhood, and specific home.
Gathering information, such as historic fair market value, is a crucial step before investing in real estate. If you need assistance in collecting and analyzing investment-related information, do not hesitate to reach out to our team of experienced investment professionals.
Image source: enjoyparkcity.com
Caption: The significance of historic fair market value in real estate valuation