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Fair market value is the price that real estate would sell for on the open market without any unusual forces being involved. The definition is relatively simple but there are certainly different methods of determining what it is.
A homeowner could order an appraisal before they put their home on the market but would incur the expense of an appraisal and more likely than not, it won’t or can’t be used by the buyer or their lender. The advantage is that an appraisal is a professional approach by a disinterested party to establish value.
Licensed appraisers use three approaches to value: the market data, the replacement cost and the income approach. The appraiser can put more weight on one approach than another based on his/her assessment of what would be appropriate.
The replacement cost looks at what it would cost to rebuild the property today less the depreciation it has experienced by age and wear and tear plus the value of the lot.
The income approach uses a capitalization rate based on the net operating income of a property to determine value. It is more applicable to commercial properties than it is for homes used by homeowners and not rented.
The market data approach relies on recent sales of similar properties near the subject. The appraiser will make monetary adjustments for differences in the comparables that are used to create a more accurate comparison.
Real estate agents use a similar approach to determine fair market value by performing a Competitive Market Analysis, CMA. Like the market data approach of an appraisal, it looks at recent sales of similar properties, it also considers properties currently for sale and what homes were unsuccessful in their attempt to sell. This approach is sensitive to supply and demand and may be more reactive to rapidly rising or declining markets.
Both appraisals and CMAs have a distinct advantage because of the personal opinion as a professional compared to online website estimates using raw data and mathematical formulas. Regardless of which method is used, it is an estimate. Obviously, some estimates are more accurate based on the experience of the person making the estimate. A price is placed on the property by the seller but value is ultimately determined by the buyer when a final sale is achieved.
While all contracts must have certain required elements, mutual assent, consideration, capacity and legality, there are some things that increase its chance of being accepted.
The seller generally wants the highest possible price with the fewest inconveniences in the shortest period of time. In the same way, the buyer generally wants the lowest possible price with the fewest inconveniences in the shortest period of time.
The perspective of the principal can change depending on how these different parts of an agreement are structured.
- Offer Price – While the price of the home seems to be the major point of contention in a home negotiation, the seller’s net proceeds and the buyer’s mortgage payment may actually be more critical.
- Financing – 86% of buyers financed their recent home purchase as opposed to the 14% who paid cash. Some financing has higher fees than other types of financing and in some instances, sellers must pay the additional charges on behalf of the buyer.
- Seller-paid closing costs – paying all or part of a buyer’s closing cost requires less cash outlay for the purchaser and makes it easier or more appealing to them to buy the home.
- Seller-paid buydown – prepaying interest to the lender on behalf of the buyer gives them lower payments for the first one, two or three years even though they must qualify at the note rate of the fixed-rate mortgage.
- Personal property – seller may agree to include existing or new personal property like washer, dryer or refrigerator.
- Improvements – seller may agree to make modifications to the existing condition of the home like floor covering, countertops, appliances, painting or other things.
- Earnest Money – more money gives the seller a sense that the transaction is more likely to close while putting the least amount at risk is generally, more appealing to the buyer.
- Timing – depending on which party is more flexible, sometimes an earlier or later closing or a position on occupancy can be an offsetting consideration that can balance the differing terms.
- Contingencies or lack thereof – requirements that must be satisfied before the contract can be closed.
The training and experience of a skilled negotiator can benefit both buyers and sellers to save time, avoid difficulties and bring all parties to an agreement. Your real estate professional should be able to help you structure a good offer and negotiate a win-win situation.
Asking the right questions will lead to the answers that help you determine which agent to use for one of the largest investments that most people make…the purchase or sale of their home.
Rudyard Kipling wrote the verse “I keep six serving men, they taught me all I knew; their names were what and why and when and how and where and who.” Prefacing your questions with one of these words can help you get the information you need to make a good decision about the REALTOR® you use.
- How long have you been selling homes and is this your full-time job?
- What designations or other credentials do you have?
- How many homes did you and your company sell last year?
- What is your average market time compared to MLS and your top competitors?
- What is your sales price to list price ratio?
- When will you report to me on the progress of my transaction?
- Who can you recommend for service providers like mortgage, inspections, repairs and maintenance?
- Why do you want to work with me?
- Where are the biggest opportunities to expose my home to the largest market?
Finding the right person to represent you is a little like the person who ordered a lobster dinner at a restaurant. When the waiter brought out the meal, the lobster only had one claw. The customer asked why it only had one claw and the waiter said: “I don’t know; I guess it was in a fight.” The customer looked at him and said: “then, bring me the lobster who won.”
Rental homes can be a natural alternative investment choice for homeowners because they are already familiar with houses. Maintenance on a rental is not that much different than on your personal home. The same plumbers, painters and other workmen can be used to make repairs.
Single family homes offer an investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and more control than other investments.
- High loan-to-value mortgages – most investments require that you pay cash but rental properties can be purchased with 20% down payment.
- Fixed interest rates – most commercial loans are based on a floating rate such as prime interest plus one or two percent compared to real estate loans as fixed rates for the term.
- Long terms – commercial loans are generally short-term such as six months or a year with the possibility of being renewed for another six months or a year unlike real estate where a 30-year mortgage is commonplace.
- Appreciating assets – real estate has a long-term history of going up in value.
- Defined tax advantages – many investments are taxed as ordinary income but rental real estate enjoys a non-cash deduction called cost recovery, the profits from sale are taxed at lower long-term capital gains rates or may be eligible for a tax-deferred exchange.
- Control – rental homes don’t require partners and afford the investor more options than investing in mutual funds and other traditional investments.
The demand for good rentals is strong and the rents continue to go up in most markets. There are people who choose not to buy or cannot buy a home who would prefer to live in a single family home rather than an apartment.
Are you interested in real estate investments? I’d love to help or answer any questions, please feel free to reach out to me if I can be of any assistance!
Much success! Gary