Have you seen your home value estimates on Zillow, Realtor, and Redfin? For most properties, these 3 sources will have wildly different estimates. Which is the right number? Or are any of these estimates even accurate?

If you have questions about the market value of your home, you’ve come to the right place. I’ll explain why it’s so hard to get an accurate number. And I’ll walk you through the steps real estate professionals take to calculate your home’s value.

 

Let’s get started!

 

Why You Need to Know the Market Value of Your Home

 

The most common reason homeowners want to know the fair market value of their homes is because they are considering selling and want to know how much money they can reasonably expect to gain from the sale.

 

But that’s not the only reason. Maybe you’re considering applying for a home equity loan or a refinance.

 

Whatever your reason for valuing your home, you want to get it right (and no, your Zillow Zestimate® is not accurate!).

 

This post will help you understand how much your home is really worth.

 

 

The Trouble with Fair Market Value in Real Estate

 

What exactly is “fair market value”? Fair market value is the amount a reasonable buyer is willing to pay for your house at any given point in time.

 

Before we get into the process of establishing your fair market value, let’s quickly talk about 2 big complications:

 

1. Each property is unique, and

2. The market is constantly fluctuating.

 

Even if you own a tract home surrounded by other homes just like yours, your house has a unique geographic location. No other property is located at your longitude/latitude coordinates. Maybe you have a corner lot or a view of the pond! In a world where the 3 most important factors are location, location, and location, your property’s unique geographic location makes it a snowflake. 

 

And of course it’s difficult to establish a value when you’re comparing unique products. Luckily, your property is probably similar to other properties in your area, so we’ll be able to use those to at least help us gauge the value of your house.

 

Complication #2 is that real estate markets are always in a state of fluctuation. Sometimes the market changes are hard and fast, and sometimes they’re slow and smooth, but they are perpetually present.

 

This means the fair market value of your property is constantly changing. It could be one value today and a different value a month from now.

 

This means your fair market value is probably not an exact dollar value, but rather a range.

 

The Fair Market Value Process

 

To find the fair market value of your property, we need to find similar properties that sold recently, then adjust the sale prices of those properties to account for the differences between those properties and your property.

 

• Find Comparable Properties

• Make Value Adjustments

 

Step 1: Finding Comparable Properties

 

To get a good idea of the fair market value of your home, you want to compare it to multiple other properties that have sold. Choose between 3 and 5 comparable properties (“comps” for short) to calculate a correct value.

 

What constitutes a good comp? With all the criteria making a property unique (new appliances, renovated kitchen, added garage, square footage, view, etc), how do you decide which properties would make the most accurate comps?

 

 

    1.Similarity

 

First, you need your comps to be as similar as possible to your house in terms of square footage, number of beds and baths, year built, lot size, quality of construction materials, etc. These features don’t need to match exactly, but the closer, the better.

 

     2. Location

 

Location is an interesting factor because a “comparable location” out in the country could extend for miles and miles, but in the city, it could just be a block or two.

See, in the city, you may have hundreds of condos packed in tightly. And the neighborhood vibe can change from one block to the next. But in the country, you may only have a few dozen properties in a square mile, all of which share a similar environment.

The general rule-of-thumb is to focus on comps within the following ranges:

 

• Cities: ½ mile

• Suburbs: 2 miles

• Country: 5 miles

 

   3.Special Features

 

You should also consider any features that make your property special. Do you have a pool? A barn? A spectacular ocean view? These make a big difference in fair market value. Try to choose comps that share these special features.

 

   4.Timing of the Sale

 

We’ve already touched on the importance of the constant fluctuations in real estate markets. You need to compare your home to recent sales.

The faster your local real estate market is changing, the more recent your sale dates need to be to make the sale prices relevant.

As a very general rule, 6 months is a reasonable timeframe for a not-too-fast market. When markets are moving really slowly, and not many properties are selling, you might need to go back a full year to find comparable sales.

 

    5.Fair Transaction

 

The final factor in selecting your comps is to make sure the sale was a fair transaction. This means that neither the buyer nor the seller was under extraordinary pressure to complete the transaction.

Foreclosures, for example, are usually not fair transactions. The sellers are forced to transfer the property to the bank. Exchanges between family members are another common example of transactions that don’t indicate fair market value. Families may transfer properties for far less than the market value simply to keep the property in the family.

Most sales are fair transactions, but you want to give your selected comps a second look to make sure that’s the case before relying on the value of that transaction to help determine the value of your property.

What to ignore in your comps

The one thing you shouldn’t consider when deciding on your comps is sales price. Don’t ignore a potential comp because the sales price seems high or low at first glance.

 

The purpose of finding comps is to see how much homes like yours are actually selling for. Not to substantiate a value you already have in mind.

 

So if you’re going to disqualify a property from being a comp, disqualify it because of 1 of the 5 factors we just covered. Not because of the sales price.

 

Ranking Your Comps

It completely depends on the specifics of each individual micro-market at a singular point in time. How highly do today’s buyers rank a specific school district? Would local buyers trade a spare bedroom for an amazing view in this economy? Are buyers suddenly clamoring for the neighborhood in the midst of a gentrification?

 

Now, how do you prioritize these criteria? This is one of the reasons it’s so helpful to have a Realtor® in your corner. Real estate agents live and breathe the ever-evolving market. We know which factor buyers are valuing most highly at any given time. And we know how much more important that single factor is than all the other factors.

 

Step 2: Making Value Adjustments

 

You may see a pretty wide range of sale prices for your comps. And that’s completely fine normal at this stage. 

Part of the reason for the large discrepancy in prices is that we’re currently comparing apples to oranges. You may be comparing a two-bed to your three-bed. Or a home with a water view to one with no view. 

In this step, we’re going to make adjustments to the values of those comps to simulate an apples-to-apples comparison.

 

It’s best explained with an example.

 

Let’s say you have a three-bedroom home. 3 of your comps are three-bedroom homes, but then you also have a two-bed comp and a four-bed comp. How would we adjust the comp values?

 

1. The three-bed homes already match your house in terms of bedrooms, so no adjustments need to be made to those comps on the basis of number-of-beds.

2. But for the two-bed comp to really compare to your three-bed, we need to pretend it has a third bedroom. We want to know what the sale price for that home would have been if it had a third room. So we need to add the value of an additional room to the sales price of that comp.

3. And for the four-bed: we want to know what the sales price would have been if that house had only had three bedrooms. So we need to subtract the value of a bedroom from the sales price of that comp.

 

The problem we quickly run into is: how do we know the value of a bedroom? And this is a difficult problem to address because the answer (like everything in real estate!) is a moving target.

 

In family-friendly neighborhoods, extra bedrooms could be worth a lot of money, maybe

$25,000. But in urban condos, extra rooms may be seen as a waste of space and money, so they may only be worth $10,000.

Then consider that we’re only addressing one factor at this point: bedrooms. We still need to make value adjustments for all the other factors: baths, lot sizes, building materials, interior finishes, views, special features, year built, etc.

This is why it’s so difficult for homeowners (and for the nation-wide websites!) to calculate the fair market value of a property. When you aren’t dealing with real estate pricing all day, every day, it’s incredibly difficult to determine these adjustment values.

 

I hate to keep saying, “call a Realtor®!”, but really, you might want to call a Realtor®...

 

A good one will do all this for you so you know what your home is worth. And a great one will walk you through the comps they chose (and why!) and explain their adjustment values to you.

 

And that’s it! That’s the process the professionals use to accurately estimate fair market values in real estate.

 

I really hope you found this explanation of fair market values helpful.

 

When you’re ready to sell your house, please contact me. I’d be happy to provide you with a custom valuation for your property based on up-to-date market conditions and tell you about the many services I offer as a Listing Agent. Can’t wait to hear from you!

 

~Ashley