Assessor Prang on What is the Fair Market Value of a House
"Fair market value" describes how much any kind of property, including a house, is really worth. The term was coined by the IRS, which defines fair market value as the price the house would sell for on the open market; it has guidelines for determining the value of a house without actually having to sell it.
Fair market value, according to the Office of the Assessor, is the price that would be negotiated between a home seller and a buyer who have no personal relationship. It's the price that would be reached in a transaction in which neither party was coerced to take part – for example, a "motivated" seller who needs cash immediately – and in which both parties have equal access to information about the house. In real estate, such sales are called "arm's length" transactions.
Fair market value determines how much a person can write off on their taxes when they donates a house to charity, how much in taxes a person will owe when they buy and sell houses as investments, and how much the government must pay homeowners when it seizes their property through "eminent domain" for public benefits as roads or parks. It also factors into determining the total value of a deceased person's estate.
The Office of the Assessor uses professional appraisers certified by the State of California to determine the fair market value of real estate. Elements that go into the appraisal include the size and location of the lot on which the house sits, the size of the house itself, the condition of the house, the quality of the neighborhood, the zoning of the surrounding area, and the potential value of the property if used for something else.
The most common method of determining the fair market value of real estate is to use comparable sales, or "comps." With this method, the appraiser compares the house to nearby properties of similar size and quality that have sold recently, adjusting the price according to any factors that might increase or decrease the value of the home that's being appraised. For investment properties – for example, houses that the owner rents out – the appraiser also takes into account the return on investment, or how much income the property produces. Finally, an appraiser can try to calculate "replacement value" – how much it would cost to build the house new – and then subtract from that any noticeable deterioration of the existing structure. Often appraisers will use a combination of approaches to reach an estimate.
For general information about assessments and property values, please visit the Assessor’s website at https://assessor.lacounty.gov or call (888) 807-2111.
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.