Understanding Historical and Current Market Values in Real Estate

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Real estate transactions can be complex and overwhelming, but one important aspect that should not be overlooked is understanding the historical and current market values of a property. Running the numbers and analyzing the fair market value is crucial in making informed financial decisions when buying or selling a home. In this article, we will explore the different types of home valuation, the importance of fair market value, and how to find and analyze historical fair market value.

Types of Home Valuation

Before diving into the details of historical fair market value, it's important to understand the various types of home valuation. These terms are somewhat interrelated, but each has its own unique source and purpose.

1. Historic Cost: The historic cost of a home refers to the actual price that was paid in previous sales transactions. This information is available through the local county courthouse, which records home sales prices whenever the ownership of a property changes.

2. Fair Market Value: Fair market value (FMV) is the estimated amount of money a home would sell for under current market conditions. It is influenced by supply and demand, and real estate agents determine fair market value by running a comparative market analysis (CMA), which looks at recent sales of similar homes.

3. Appraised Value: The appraised value is a more objective determination of a property's worth. Trained real estate appraisers consider a home's features, condition, and nearby home sales to determine its value. Mortgage companies often require an appraised value for loan considerations.

4. Assessed Value: The assessed value is used to calculate property taxes and is usually determined by a government-appointed property assessor. It is typically lower than the fair market value and is based on preset ratios or percentages applied to the fair market value.

The Importance of Fair Market Value

Among the different types of valuation, fair market value holds the most significance for buyers and sellers. It influences the list price, negotiations, and the overall perception of the property's worth. If the asking price is higher than the perceived fair market value, buyers may hesitate to make offers. On the other hand, if the asking price is lower, buyers may assume there is a reason for the reduced price, such as property distress.

Fair market value also has implications beyond the initial transaction. It serves as a basis for insurance claims, property donations, estate taxes, and more. Homeowners should keep track of their property's fair market value even after the purchase is complete.

While appraised value and assessed value are important for mortgage and tax considerations, fair market value often influences these values. Therefore, it is crucial to have a clear understanding of fair market value when dealing with real estate valuation.

The Intersection of Historical Cost and Fair Market Value

When evaluating a property's worth, some buyers, especially investors, prefer to consider the historical fair market value. This historical data provides insight into how the property has appreciated over time and can offer confidence in its future potential as an investment.

Historic cost, although easily obtained through public records, may not always provide an accurate indicator of a property's true value. For example, a property may have been sold to a family member for a nominal price or sold in a distress situation, both of which do not reflect the property's actual worth. Therefore, looking at the historic fair market value provides a better indication of a property's value.

To determine the historic fair market value of a home, several information sources can be consulted. These include online tools, working with a real estate agent, checking sales prices and tax assessments, and ordering a home appraisal.

Consult Online Tools

Online tools can provide a starting point for understanding historical fair market value. Websites like Realtor.com and Zillow.com offer estimates and historical data on property valuations. While these tools may have some limitations and should not be solely relied upon, they can give an initial glimpse into a property's value trends.

Neighborhood Scout is a pay-to-play tool specifically designed for investors. It provides detailed reports on appreciation history, comparative analysis, and forecasts, offering valuable information for informed decision-making.

The FHFA Housing Price Calculator, although not showing historic fair market value, uses local appreciation data to project future home values. This can be helpful for those looking for the targeted result of future worth.

Work With a Real Estate Agent

Real estate agents have access to multiple listing services and can provide valuable insights into historical fair market value. They can interpret online valuations, identify their limitations, and provide more accurate information based on their local expertise. Additionally, they can access historic data in the MLS to pull reports for a more precise valuation.

Check Sales Prices and Tax Assessments

Comparing historic cost and assessed value with fair market data obtained from online sources and real estate agents can provide a more comprehensive view of a property's history. Sales prices and tax assessments are public knowledge and can be easily searched online. Analyzing these numbers in conjunction with other valuation information can reveal valuable insights.

Order a Home Appraisal

While an appraisal focuses on determining the appraised value rather than fair market value, it is still a valuable tool in understanding a property's worth. Appraisers consider various factors, including square footage, condition, renovations, and appreciation trends. Engaging an appraiser and discussing their chosen comparables and their thoughts on historical values can provide additional information for evaluating a property's historical fair market value.

Understanding historical fair market value is an essential step in the real estate investment process. By gathering and analyzing relevant information, buyers and sellers can make informed decisions and navigate the market effectively. Whether using online tools, working with real estate agents, checking sales prices and tax assessments, or ordering a home appraisal, taking the time to understand a property's historical fair market value can lead to successful transactions.