Fair Market Value, Appraised Value, Assesed Value and Other Property Valuations

The real estate industry brings together many different players including investors, potential homeowners, mortgage lenders, insurance companies and the government. Property value is extremely important to all these sectors for different reasons. But if you asked each of them what a specific property is worth, you would probably get varying answers. The reason for this is that different parties have unique goals.

Potential homeowners want the lowest price they can get, insurance companies need to know the value they are insuring the property for, the government wants to determine what amount of property taxes to charge and so on. The combination of these unique goals and the varying factors that each party needs to consider result in diverse property value figures. So in essence, the value of a certain property will depend on whom you ask.

1. Potential Homeowners

When you are looking to buy a home, you want the fairest value you can get based on things like location, size and condition of the property. This is referred to as the fair market value. It is the most commonly used form of property value and is also used as a basis for calculation of several other types of property values.
Fair market value is defined as the probable price that would be paid by a buyer to a seller when both parties are willing, knowledgeable and unpressured participants to the transaction. (http://www.businessdictionary.com/definition/fair-market-value-FMV.html) Basically, it is what a home would be worth in an open, free and fair market.
Despite the seemingly precise definition, arriving at the fair market value (FMV) of a property is not an exact science. The final figure is just but an estimate. To arrive at this figure, it takes the expertise and experience of a professional appraiser also referred to as a property valuer.

One of the biggest factors that influence the FMV of a property is its condition. Before any deal is struck, it is important to have a professional home inspector (different from an appraiser) examine the house and determine its condition. This includes noting any deterioration and improvements.
The appraiser will then use an inspector’s report, current real estate market situation and his own experience in combination with various approaches to estimate the final FMV of the house.

Comparison Approach

One of the approaches an appraiser can take to determine market value is by using comparables. To get a rough idea of what a house in San Francisco would cost you, you are going to look at recent sale prices of other houses, right? This is the same idea that an appraiser might use.

Comparables are properties in the same location that are almost similar to the subject property. They have to had been sold within the last year and in an open competitive market. (http://www.investopedia.com/articles/realestate/12/real-estate-valuation.asp) An appraiser will often take into account three or four comparables. By looking at their sales prices and adjusting for any differences with the property being valued (e.g. size, condition, neighborhood etc.) the appraiser can tell roughly how much the property should be worth.
The fair market value is also used by loan lenders and insurance companies.

Liquidation Value

Another type of property value that homeowners and potential homeowners should know is liquidation value. This is the value of a property when it is sold too quickly. It is often lower than the fair market value. This type of property value can apply when the seller finds someone willing to pay in cash or when he/she is under pressure to make a quick sale. E.g. threat of foreclosure.

2. The Government

Local governments in the United States collect a big part of the budgets from property taxes. These taxes are used to fund local government expenses such as schools, fire departments, law enforcement and so on.

To calculate the taxes due for each property, the assessed value of a home has to be determined. In most cases, tax assessors employed by the local government act as appraisers to estimate the market value of a property. It is from the market value that the assessed value is calculated.

Once a market value has been reached at, an assessment ratio is applied. In most jurisdictions, assessment ration is between 60-80%. For example, if a tax assessor finds that the market value for a house is $100,000 and the assessment ratio is 80%, the final assessed value will be $80,000 (100,000 X 8/100). The assessment ratio is not constant, often changing from year to year.

Thus, the sole purpose of assessed value is calculation of property taxes.

3. Investors

If you are buying a property for investment purposes, you will approach property valuation a little bit differently. Unlike the potential homeowner, you want to pay a price that will allow you to make a profit later should you resell the property. You are also looking to pay a price that is worth the potential future income of the property. Depending on what kind of investor you are, different types of property values will apply.

After repair value:. A flipper will often have to rehabilitate a property before reselling it. His or her focus therefore will be the value of the property after all repairs and improvements are done. This is the After Repair Value (ARV). The cost of required repairs is subtracted from the fair market value of a property.

Investment value: This is the market value to an investor. There are several methods used to calculate investment value.

Getting a Property Value Estimate Online

You can get a rough estimate of what your house is worth on sites like Zillow, Trulia and Realtor.com. These sites have tools for use in calculation of an estimate property value. It is important to note that the figures you receive on these sites after calculation are just estimates. They may be much lower or higher than the true market value.

To know the true worth of your property, the best course of action is to hire a real estate appraiser. Make sure that you find one that is certified and licensed. This is especially if you are about to undertake a major transaction such as selling or leasing.

There is no sticker price for your house. Its worth depends on who the interested party is; the government, loan lender or potential buyer. At the end of the day, the real value is what the buyer is willing to pay.