Fair Market Value - A key to investing in real estate and structuring a good purchase is your ability to know the fair market value (FMV). You must understand the asking price and the list price are not the fair market value; they are what the sellers want. These figures could have been pulled from the air or the Realtor may have suggested the price. Below are four quick ways to find FMV.
1. Comparables - Contact a Realtor and ask for sold comparables in a specific area or community. They can often provide you with several properties that have sold. This will give you a general idea of the FMV in the local area.
2. Appraise and Analyze - An estimate of value of what a property would sell for under normal market conditions; completed by a professional appraiser. Analyze what a seller wants and what he or she will get.
3. Tax Assessed Value – Yearly the local county government tracks the value of a property. Most are below market value. If you do an average in your community, you will find they are consistently at a rate below market value, for example 85 - 90% of market value. A good rule of thumb is to be able to purchase a home 15% below assessed value. This does not always hold true but can be a good gauge.
4. Courthouse Records - Visiting the tax assessor’s office can help you locate the value of homes in a specific area or community. Simply research houses that have recently sold in that area. (Internet access)
The comparable method is the most basic and commonly used method of value estimation for single-family homes. Other Evaluations In addition to the standard evaluation techniques of comparables, appraisals, tax assessments, and courthouse records to determine fair market value, properties can be evaluated in a number of other ways. Most evaluate the return on investment or are used to code an ideal property. There is a number of quick and easy coding systems that can help you evaluate properties:
1. Quick Appraisal The quick appraisal system codes mid range properties. This is a simple A B C system. The ‘A’ property is the middle range property in your community, the ideal property for resale and marketing.
2. Conversion Ratio The conversion ratio is a simple system of looking at the cash invested into the property and the equity of the property. Anytime you can find an investment that returns three times the equity of the property, generally the property is a good choice. Even if the market moves down, the equity is substantial.
3. Profit Margin The profit margin of a property is the fair market value minus the purchase price and is quoted as a percentage. A 40% - 50% profit margin is a fair deal with room for error. Even if the property needs work, there is usually room for profit.
Lisa: great post. You've really covered some important useful info here. Good looking out!
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