Calculating the Fair Market Value of a Home

The fair market value of a residential property can be calculated by comparing the recent sale prices of similar homes in the neighborhood.

Utilizing the services of a professional home appraiser is the most accurate way of calculating the fair market value of a home. However, it is possible to crunch the numbers without hiring an appraisal service by analyzing the sale prices of similar homes that have sold in the prior 6 months in the same neighborhood.

Understand the Features that Drive Value

Valuing a home is not an exact science, but professional home appraisers take a number of key features into consideration when determining a home's fair market value. These include the property's age, lot size, internal square footage, the number of bedrooms and bathrooms, type of heating system, amenities and overall condition. Location is critical. Homes in a neighborhood with low crime rates and better transportation links tend to have a higher value than homes in which lack these features. The first step is to look at the property with an appraiser's eye and write down its principal features.

Check Out the Neighborhood

Researching similar homes for sale in the neighborhood can give a good indication of how much a home might be worth. Use property websites such as Trulia, Zillow, or Redfin to look up properties that are roughly the same size, construction, age, and style as the property being valued and have the same number of rooms, layout, and other features. Make a note of how quickly these homes sold and at what price. Ideally, four or five comparable homes (or "comps") that have sold or been listed 6 months prior are needed to ascertain a fair market value.

Figure Out the Rate per Square Foot

For each of the comps, divide the selling price by the property's square footage. To determine the price per square foot (or PPSF). Find the average value of these homes by adding the PPSF figures together and dividing by the number of comps used. For instance, suppose the following comps are used:

•    Property A is 2000 square feet and sold for $420,000. The PPSF is $210.
•    Property B is 2200 square feet and sold for $480,000. The PPSF is $218.
•    Property C is 1900 square feet and sold for $390,000. The PPSF is $205.
•    Property D is 2000 square feet and sold for $475,000. The PPSF is $237.

The average price per square foot is thus $217. Multiply this figure by the square footage of the home being valued to get an idea of its fair market value.

Consider Special Qualities of the Home

While the PPSF gives a baseline valuation, it does not take into account the unique characteristics that could raise or lower a home's value. Upgrades such as a new bathroom, kitchen, or siding tend to add value; conversely, it's likely that a home in poor condition will have a lower value than a well-maintained property. There's usually a wide variety in prices per square foot based on these factors. Ultimately, it is up to the homeowner to decide whether a home is worth more or less than the average PPSF in the neighborhood.

Go Down the Traditional Route

To sense-check figures, ask a real estate professional to run a comparable market analysis. This detailed report is similar to the analysis above, but a real estate agent has access to more comprehensive selling data such as available properties, pending properties, expired properties, and typical days on the market. This data should translate to a more accurate valuation report. For a definitive valuation, contact a professional home appraiser. Home appraisers undergo 150 hours of classroom education and gain 2000 hours of experience before they are licensed to value properties. They are the only professionals that banks and lenders rely on to provide opinions of a home's fair market value.
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NOTE: This information is not intended as a complete guide regarding property tax laws. Information here has been derived in part from written and oral opinions from the California State Board of Equalization.