One of the first questions we get from sellers is what determines the value of their home. It’s frustrating because they are likely aware of the tax assessor’s value and they may have looked at an online service such as Zillow. Value is also established by an appraisal. Lastly, the fair market value is given by a real estates agent like me and my Team. Confused? You’re not alone because it all seems like a mystery to most homeowners.
Let me offer this definition which might help unravel the property value equation. Generally in any area, fair market value is the price that a property would sell for on the open market without any unusual forces being involved. What I mean by unusual forces means blighted areas, a new or expanded road planned that abuts the property boundary, etc. The definition is relatively simple but there are certainly different methods of determining what is your property value.
Many Realtors® such as ourselves, recommend our homeowners get a certified bank appraisal before putting their home on the market. The advantage is that an appraisal is a professional approach by a disinterested party to establish value. One benefit to having a current appraisal is it gives buyers confidence that a lender would likely write a mortgage on the property at the appraised value.
Licensed Appraisers Use Three Approaches to Determine Value:
- The market data, the replacement cost, and the income approach. The appraiser can put more weight on one approach than another based on his/her assessment of what would be appropriate.
- The replacement cost looks at what it would cost to rebuild the property today less the depreciation it has experienced by age and wear and tear plus the value of the lot.
- The income approach uses a capitalization rate based on the net operating income of a property to determine value. It is more applicable to commercial properties than it is to homes used by homeowners and not rented.
The market data approach uses recent sales of similar properties near the subject property. The appraiser will make monetary adjustments for differences in the comparables that are used to create a more accurate comparison based on generally accepted principles.
How Do Realtors® Determine Value?
We Realtors® use a similar approach to determine fair market value by performing a Competitive Market Analysis, CMA. Like the market data approach of an appraisal, it looks at recent sales of similar properties. It also considers properties currently for sale and what homes did not sell. This approach is sensitive to supply and demand and may be more reactive to rapidly rising and/or declining markets.
Appraisals and CMAs have distinct advantages because of the personal opinion of a professional compared to online website estimates using raw data and mathematical formulas. Regardless of which method is used, it is an estimate based on the time of the need. Some estimates are more accurate based on the experience of the person making the estimate. A price is placed on the property by the seller but the value is ultimately determined by the buyer when a final sale is achieved.
For a more comprehensive explanation or to get an estimated value on your property, be in touch with us. If you are outside the Greater Naples FL area, we have relationships throughout North America. We would be happy to introduce you to a well-established real estate professional.