How Do I Determine The Correct Value Of The Home I Want To Purchase?

By Shayne Bowen

First, a definition: The "fair market value" of a property is the price that an experienced real estate appraiser or agent would assign to the property. The various approaches to determining fair market value are:

• Decide the fair market value of the home based on other comparable properties that you've seen in similar areas. It's important that you compare properties that are comparable and properties that are in similar areas.
  
  
• Decide the fair market value based on the length of time that the property has been on the market. This aspect is a key driver for determining the fair market value of a property. If the property has been on the market for a long period of time (two months or more), this is a strong indicator that the property is priced higher than fair market value.

If, on the other hand, you are in a hot market, and the property is generating offers quickly (under 30 days), there is a very high probability that the property is priced at fair market value!

• Another method of determining the fair market value is to look at comparable sales in the same neighborhood of the property that you are interested in.
  
  There are, however, significant limitations related to looking at comparable sales. First, the client frequently does not have enough time for the offer to be written (which takes 2-4 hours) plus the time that is required to look at comparable sales. Second, there is often significant time pressure to get offers written once the right home has been identified -- in order to get the offer presented before multiple offers occur.
  
  If there is time, look at comparable sales. But it's also important to use the other methods listed above. Note: in hot markets and with "A" grade listings (even during slower markets), there is often intense time pressure to get the offer written before other people do, in an effort to try to avoid multiple offers.

One last thought on determining the fair market value for the home that you would like to purchase -- and this idea is, in the final analysis, the most important one.

It's my strong advice (if at all possible) to avoid making an offer on a home until you have seen enough homes that you "just know" whether a particular property is priced well.

What do I mean by this? Quite simply, all my years of experience have shown me that a purchaser isn't "ready" to wisely purchase until they've seen enough homes that they can tell -- without the real estate agent's advice -- the correct fair market value for the home, based on their own experience of viewing comparable homes.

How many homes are "enough?" At least ten, and preferably 15, or more.

I can always tell when a client has done sufficient "homework" (seen enough homes) to purchase wisely.

When this point is arrived at, I frequently hear off-handed, casual comments from the purchaser (without any prompting from me) that sound something like: "This home is priced very well," or This home is priced awfully high."

If at all possible, this is the experience level that I prefer that my clients have before making an offer.

The point is simple: By seeing a representative sample of the comparable homes in the price range that you are looking in, you will literally end up being a minor "authority" on that particular price range, in that particular market.

When you have reached this point, you really have become an "expert" in your own right (albeit in a narrow price range, in specific neighborhoods, and in a particular market).

When you've seen enough to simply know, based on seeing several other comparable homes in the same type of neighborhood, you are ready. The necessary homework has been completed.

The ultimate evidence that a purchaser is ready to make an informed purchase decision is that they have done enough homework (viewing of similar homes) to know the value of a home even before asking me.

Of course, I am always very happy to assist my clients in arriving at fair market value. But my clients will make a more assured and comfortable purchase decision once they have seen enough homes that they know -- on their own -- that they are making an offer at a price that represents conservative fair market value for the property that they wish to own.

In the final analysis, most purchasers use a combination of the various methods noted above to arrive at the conservative fair market value for the home that they wish to own.

Each of these methods has its strengths and limitations . . . But the most important of these, when all is said and done, is quite simply: "Do the necessary homework."

In this sense, it's really quite simple. If a person wanted to purchase some fitness equipment, shouldn't that person do some comparison shopping of  similar equipment, in order to arrive at an accurate sense of the relative value of each piece of equipment?

It's the same here. Determining conservative fair market value for the home you wish to own is simply a matter of comparison shopping, with a keen eye to the length of time it has been on the market, and how hot, or cool, the current real estate market is.

I happily provide extensive advice in this area. However, it's important that (if at all possible) my clients independently arrive at their own estimation of fair market value. By seeing enough homes that they know how much a home is worth on their own, the wise client is able to make secure, smart, and financially sound purchase decisions.