The California housing market has changed a lot over the past couple of years. During…
When buying a home in the San Francisco Bay, you’ll eventually encounter the phrase “fair market value.” This is one of the most important concepts to understand when making an offer on a house. The amount you offer should be based on current market conditions and trends, as explained below.
Determining the Market Value of a Bay Area Home
So, how do you determine the fair market value of a house in the Bay Area? Where does this figure even come from? Is it the same as the asking price? Does it come from a home appraisal?
These are some of the most frequently asked questions about real estate market values. In this tutorial, we will answer all of these questions and more. Let’s start by defining some terminology.
The fair market value of a Bay Area home is not based on the assessed value of the property. The assessed value comes from the tax assessor’s office, and is assigned for taxation purposes only.
Market values, on the other hand, are based on the forces of supply and demand within the local area. They are determined by what people are willing to pay in the current market. This is the kind of information you need, when shaping your offer.
Researching Sales Prices in the Area
So, how do you determine the fair market value of a home in the San Francisco Bay Area? The best way to do this is by examining recent sales data in the same area where the subject house is located.
You can get a general idea what a particular home is worth by seeing what similar properties have sold for recently. This is what real estate agents refer to as comps.
If you’re using a real estate agent to buy a house, he or she should help you determine the fair market value based on comparable sales in the area. This is one of the agent’s most important responsibilities when it comes time to make an offer. Your agent can “run the comps” to see how the asking price stacks up.
Example: John and Jane are seeking a one-story home in Walnut Creek, California. They need three bedrooms and two bathrooms, ideally with about 1,200 square feet of space. So they go onto Realtor.com, Zillow, and other listing websites to see what similar homes have sold for recently.
Within the last couple of months, most of the properties in their desired location with their desired features have sold for $800,000 to $850,000.
They’ve just determined the fair market value for the type of house they’re seeking. They could also find a home that they like first, and then determine the fair market value based on comparable sales. Either way, the steps are the same.
It’s Not the Same as the ‘Appraised Value’
The fair market price is also different from the appraised value. They can overlap (and often do), but they are technically two different things. Here’s the key difference between them:
- The appraised price is the result of a professional home appraisal conducted by a licensed appraiser. It is one person’s opinion.
- The fair market value, on the other hand, can be determined by anyone who has access to local market data. It’s primarily based on recent sales trends.
You could determine the fair market value of a house in the Bay Area simply by evaluating recent sales on Realtor.com, Zillow or Trulia. But you cannot issue an appraised value for a home, unless you happen to be a licensed appraiser.
These two values might be based on the same data, but they are still two different things. It might seem like we’re splitting hairs here. But it’s an important point to remember. As a home buyer, you should understand these differences and similarities.
How It Differs from the Asking Price
When you make an offer to buy a house in the Bay Area, it should be based on the fair market value of the property. Your offer will be influenced by current conditions, recent sales, and supply and demand. It should not be based on the seller’s asking price — at least not entirely.
Consider the difference:
- Some sellers conduct plenty of due diligence when setting their prices. They evaluate the comparable sales we talked about earlier to determine what their homes might be worth in the current market. This is the smart and sensible way to go about it.
- Other sellers set their asking prices based on the amount they currently owe on their mortgage, or the amount they paid for the home when they first purchased it. But those two figures might not reflect the current market value of the property.
The point is, you should take the seller’s asking price with a grain of salt. The best way to determine the realistic market value of a home in the Bay Area is by researching comparable sales in the area. And be sure to leverage your real estate agent’s expertise in this area. It’s their speciality!