Determining Fair Market Value (FMV)

When looking at potential properties to invest in, one of the most important numbers you'll need to figure out is the Fair Market Value or FMV.  The FMV tells you what that property is worth and capable of selling for in today's market. 

Steps to a good estimate:
1.  Gather information:  Sq. Ft., Beds, Baths, etc.
2.  Use online Real Estate evaluation services such as Zillow.com, CyberHomes, eAppraisal, Trulia.com
3.  Get statistics on at least 3 properties that have sold within the last 6 months within 1 mile(ish) of the subject property.  Try to get homes that are comparable in terms of what kind of shape the subject property is in - i.e. if the subject property needs some rehab work done, don't pick a comp house that has just been fully redone and then sold - you're looking for something that's comparable not opposite extremes.  You need to compare apples to apples, not apples to peaches.

You're using sold homes instead of currently listed homes because that shows what kind of money people are actually spending in the area, not what sellers/agents are hoping people will spend in the area.

Alright, time to do some math:
Let's say you're looking at a house that is 2115 Sq. Ft. with 3 beds, and 1.5 baths.  So you'll go look up that property on the sites listed above and find 3 properties that are similar in size and find out what they sold for.  Make sure the statistics (Sq. Ft., beds, baths, etc.) of the comp homes is as close to the subject property as possible.
Comp #1 - 2000 Sq. Ft., 4 beds, 2 baths, sold for $200,000
Comp #2 - 1900 Sq. Ft., 3 beds, 2 baths, sold for $188,000
Comp #3 - 1825 Sq. Ft., 3 beds, 1.5 baths, sold for $191,000

Next you're going to find the total Sq. Ft. and the total sold prices of the 3 comp homes.
2000 Sq. Ft.+1900 Sq. Ft.+1825 Sq. Ft.=5725 Sq. Ft.
$200,000+$188,000+$191,000=$576,000

Then you are going to find out how much each square foot is worth by taking the total sold price ($576,000) and dividing it by the total number of square feet (5725).
$576,000/5725 Sq. Ft.=$100.61 per square foot

So now you know how much a single square foot of property costs in the area of the home.  This allows you to find out how much your potential investment is worth by taking the price per square ($100.61) times the square footage of the subject property (2115).
$100.61x2115=$212,790.15

This means that you have somewhere to start when considering your starting offer.  If the home is worth $212,790.15 in today's market then you know that you want to make an offer and eventually purchase the property for this price or lower.  That way you know that you're money is being strategically and smartly spent.

The key points you need to take away from this are:
1.  That this is not an exact science, but it's at least a place to start when pricing a potential investment.
2.  Make sure you look at  the quality of the house as well.  The numbers are helpful but may change depending on the shape the house is in.
3.  Price can be adjusted for beds, baths, etc.
4.  You can always get a second opinion - have one of the agents in your professional team to get you a Comparable Market Analysis (CMA)
5.  Network with other investors to see what they would pay/are paying in a certain area (remember to protect your product though - don't give details!)
6.  Remember that it's just an opinion when it comes to estimates - you need to take other factors into consideration and take the estimate for what it is - a guideline.


Jason