Experts believe that there will be a “great wealth transfer” in the next twenty years. The amount that baby boomers and Silent Generation members will pass on to their heirs will be eye-popping. The heirs should collectively receive a whopping $72.6 trillion in total.
These inheritances will include houses, condos, and other types of inherited property. At least some will choose to live in their relatives’ properties. Others will want to sell the property and use the money for another purpose.
The latter group, however, may find themselves asking one question. How do you determine the fair market value of inherited property?
For many, this will be the first time they’ll be selling a property. They will need to do a lot of research before they can even begin. If you’re someone who needs to learn about selling an inherited home, read on.
What Is Fair Market Value?
Property fair market value is a hypothetical estimated market value or EMV in real estate. It’s an educated guess on what a buyer is willing to pay to get a home or property. If a seller gets close enough to the fair market value, they should attract enough buyers and gain a fair profit.
Experts further define fair market value as having certain conditions. The buyer and seller must be:
Both the seller and buyer must have enough knowledge on hand about the property to make an informed decision. This doesn’t just include any knowledge that the seller and/or buyer has picked up on their own. It also includes any information that the buyer and/or seller have picked up from each other.
In essence, neither the buyer nor the seller should take advantage of the other party’s naivety. Also, neither of them should lie about what they believe is the fair market value. Doing so is considered fraud.
For example, a seller could know that a property is worth $100,000 but tell a buyer that the property is worth $150,000. An ill-informed buyer could still buy the property at that price. However, that $150,000 would not be a fair market value.
In Their Own Best Interests
People don’t always act in their own best interests. A seller, for instance, could be emotionally compromised after the death of a loved one. They may sell their loved one’s property at a cheaper price so they can get rid of it quickly.
Buyers can be emotionally compromised as well. They may be struggling with a mental illness of some kind and that causes them to spontaneously buy a house. Mania, for instance, can cause spontaneous shopping sprees.
As long as the buyer and/or seller don’t know about the other’s poor condition, they shouldn’t get in trouble. However, the price at which compromised parties sell the house is not considered fair market value.
Have Time to Make a Decision
To make a house’s price its fair market value, the buyer must buy a home of their own free will. If any outside forces interfere with the sale, the house’s price likely won’t be considered fair market value. Time is one such pressure that can interfere with a house sale.
Either party may feel pressured by the need to find a new home, gain a lot of money, etc. quickly. Time is also a type of pressure that a seller can put on a buyer. A seller can tell a buyer that they will only pay a certain price if they buy the home within a certain time frame.
Even if the price is near the fair market value, the buyer may not have been willing to pay this price without the pressure of time. Say that the seller is offering the buyer a “deal” of $160,000 for a house if they buy it within 24 hours. The buyer will be unable to research the home and find out if the buyer is lying about the price.
Free of Undue Pressure
Time isn’t the only pressure that buyers and/or sellers can face when they’re dealing with a house sale. They can also face other pressures like blackmailing or threats of violence. These pressures may or may not come from the opposing party.
Other pressures, for instance, can include fears of natural disasters, fears of the current location, and struggles to keep up with house payments. Like with the pressure of time, this can cause a person to buy or sell at a much lower price.
What Fair Market Value Isn’t
Inherited property sellers like yourself may confuse property fair market value with similar terms. You should learn the difference before you start speaking with buyers, real estate agents, and other real estate experts. That way, you’ll have an understanding of what the other party is saying.
If you gain the right information from them (not hearing something incorrect out of ignorance), you’re less likely to make mistakes. Learn a bit more about some different real estate terms and the differences between them below.
Many will use “market value” as a shortened version of “fair market value”. So the two can be used interchangeably. However, “fair value” and “fair market value” are not as similar.
Fair value uses more fundamental methods to measure value. Experts do not determine it by using the fluctuations of the market as they do with fair market value. Because of this, an asset’s “fair value” is more likely to remain the same throughout its life.
In addition, fair value is a legal construct and is more often used in legal cases and the stock market. Thus, you shouldn’t come across the term “fair value” very often in the real estate industry. However, it’s good to know the difference as you don’t want to confuse anyone who knows about both terms.
Yes, fair market value is often used as the starting point for determining fair value. However, that is their only true connection.
The appraised value is like a more educated version of fair market value. Both are objective forms of a home’s value. However, an appraised value must come from a certified and licensed home appraiser.
The difference is skill and experience. A skilled and experienced appraiser should make a far better estimate of a home’s value than an amateur. Some lenders won’t even accept a house as collateral until an official appraiser assesses it.
Use This Value
When you go to sell your inherited home, you should set your price reasonably. You may not get as much as you could if you set your price too low. If you set your home price too high, you could end up without any buyers.
Therefore, you should set your price close to the appraised value rather than a home-brewed fair market value. However, you can choose to use the latter if you wish.
Your inherited home’s assessed value is more something that the home’s future buyer will deal with. This is a figure that your local government will use to determine the property tax you’ll pay. More specifically, it’s a percentage of your property’s fair market value.
Your county’s assessor is the one who calculates it. There’s no appraiser involved in this process.
How It Affects Home Selling
However, it can still make a bit of a difference in the amount of money that you make when you’re selling your home. Buyers can look up the amount of property tax they have to pay on their inherited home. If that property tax seems unreasonably high, they may back out of the deal.
Check This Value
It’s reasonable for property taxes to be quite high. They’re often the second biggest homeowner expense after a mortgage. However, they can also be too high because of an administrative mistake.
Consider investigating property taxes that seem too high. You can go to your county’s assessment website and make sure all the information listed is correct. There may be issues with the number of bathrooms, square footage, etc.
What Determines a Fair Market Value?
So what factors go into property fair market value? It goes a lot deeper than what a person is willing to pay. Many deeper factors influence a potential buyer’s desire to pay a certain amount for a home you’re selling.
Here are some of them:
Some experts believe that a home doesn’t rise in value at all. Because of average wear and tear, a home’s physical characteristics tend to depreciate. However, the property that the home sits on can greatly rise in value.
A home’s location is one of the biggest determinants of its value. One of the first things a potential home buyer will do is look at the area around a home. They will check such factors as how safe they are and what amenities they can easily reach.
Houses that sit in neighborhoods with high crime rates tend to have lower values. This makes sense. If people can get a safer home elsewhere for a similar price, they will buy that home instead.
Homeowners Associations (HOAs) get kind of a bad rap in popular culture. We’ve probably heard about people getting fined because their grass was too long. However, HOAs do a lot more than protect property values by issuing fines.
HOAs also beautify neighborhoods, maintain community amenities, organize community events, and otherwise improve quality of life. This is why home values climb when an HOA forms in a neighborhood.
When a community has a large number of amenities, the homes within it tend to have higher values. In this situation, amenities can be defined as parks, restaurants, retail stores, recreational areas, and mass transit access. Potential home buyers may also like the safety they feel being close to a hospital, fire department, police station, etc.
Parents who care about their children’s future will be on the lookout for good schools for their children. This is why the fair market values of homes in high-performance school districts tend to grow exponentially when a district gets a high rating. Average grades given by the state and website ratings are both factors that help parents choose schools.
What Homebuyers Value
It used to be that urban locations were more in demand than rural locations. This happened because urban locations tended to have more opportunities, and that’s what people valued.
However, now rural homes are becoming a hot ticket item. Remote work and education opportunities have made it possible to move out of a crowded and polluted city. Home buyers are instead looking for healthy, wide-open spaces and a better sense of community.
Home Supply and Demand
How many products do producers wish to sell and how many products do consumers wish to buy? The relationship between these two factors is known as the law of supply and demand. The average price the producers and consumers agree upon is known as the equilibrium price.
If the demand for a product is high and the supply of a product is low, producers can usually command a high price. If a product is in high supply but the demand is low, producers will have to sell the product at a lower price.
In the Housing Market
Supply and demand work the same way in the housing market. The fewer houses there are to sell, the higher the prices that house sellers may get for them. The higher the number of houses there are to sell, the lower the amount buyers are willing to shell out for a home.
You can take advantage of this. If you don’t need or want to sell your inherited home right away, consider waiting for a period of the highest demand and lowest supply. You may be able to get a higher price.
Comparable Property Price
Comparable properties (also known as real estate comps) are properties that are similar to your property. They have similar ages, features, square footage, and conditions to your home. As the prices of these properties climb, so does the price of your property.
Prices climb when there are bidding wars in certain communities. Homes sell for higher prices than what similar homes sold for in the past. This will have a domino effect on the prices of comparable properties.
Comps Set Prices
This happens because appraisers and real estate agents use real estate comps to determine property value. As long as the selling prices of comps continue to stay high, the prices of new homes will stay high. If bidding wars continue, prices may continue to climb.
Size and Usable Space
A home with a large size and lots of usable space will always command a higher price than a smaller home with less usable space. “Usable space” usually means the bedroom, living room, kitchen, bathrooms, etc. It usually doesn’t include attics or basements, even if they are finished.
If your inherited home is smaller than other types of homes, don’t worry. You can always add additions to your home to increase its fair market value. Just make sure you choose house size changes that have the best return on investment (ROI).
Added Updates and Upgrades
Size changes aren’t the only upgrades that you can add to your inherited property. There are also many modern features, modern layouts, and other smaller changes you can add. Performing these upgrades may be a better idea if you’re on a tight budget.
Adding these won’t just increase your inherited home’s fair market value. It can also attract more buyers and increase the chances of your inherited home getting sold fast. Here are some examples of common profitable house upgrades:
An inherited property is bound to have plenty of older appliances. Potential housebuyers may want a lower price if they know they’ll need to replace the appliances soon. This won’t be the case if you replace the old appliances with newer ones.
You don’t even need to get the newest appliances you can find. Save on your expenses and get the most profits by buying secondhand alternatives. If you choose carefully, you can find ones that work as well and look as new as brand-new ones.
These days, many people are growing more eco-conscious. They want the products that they consume to be more eco-friendly. You can pander to these demands by adding system improvements or installing new systems entirely.
For example, many old HVAC units are far less energy-efficient than newer ones. If you have the funds, you may want to consider adding a new, more efficient HVAC unit. Eco-friendly home buyers should be willing to pay more to have a home with this type of feature.
Other systems that can make an inherited property more eco-friendly include roofs, windows, and new garage doors.
Landscaping is a good idea for a home improvement project. One of the biggest reasons why this is so is that it can improve your home’s curb appeal.
Curb appeal is how your home appears to someone from the curb. Think of it as your home’s first impression. If your home makes a good first impression, home buyers are more likely to buy it.
In addition, improving your home’s landscaping can be easy and cheap. Sometimes all you need to do is trim plants, replace old ones, repair dead lawn areas, etc.
Governments use “zoning laws” to dictate the ways a certain piece of land is used. For example, the government may only allow one area to have industrial buildings. Ideally, they’d set this area away from a residential area to protect a community’s health.
Zoning laws can also dictate the types of buildings allowed in an area. Residential areas can be low, medium, or high-density. Low-density places would be single-family homes and high-density places would be, say, apartments.
Upzoning and Home Value
In many cases, a boost in population can make it necessary for governments to change residential zoning to allow for greater development. They may, for example, change a low-density area to a high-density one. Experts call this move “upzoning”.
When this happens, the value of certain residential areas can soar. Real estate investors will want to buy properties that are ripe for development. They’ll bid over these properties and raise the value of these areas.
Check Your Property’s Zoning
This is where you can come in! Look at the zoning of your inherited property. Did it change recently?
If so, you can make that a part of your marketing. Try targeting real estate investors.
Current Interest Rates
When the economy slows down, mortgage rates fall. The reason why this happens relates to the supply and demand section above. Because lenders only have so much money to lend, when demand for mortgages increases, interest rates increase.
Low Mortgages, High Home Prices
In situations where mortgage rates are high, fewer people will be able to get mortgages to buy homes. The demand for homes will die down and house prices will fall.
High Mortgages, Low Home Prices
Once mortgage rates become lower again, more people will be able to buy homes. Some will try buying homes for the first time and others will upgrade to a better home. Thus, the demand rises and so do the house prices.
This is another situation where you need to keep an eye on how these factors change. If you can sell your inherited home at a time when mortgage prices are low, you can make a great profit on your inherited property.
Did you know that it’s a bad idea to try and sell a home around the year of a presidential election? This happens because buyers don’t want to make huge financial decisions when the country’s future is uncertain. After the election, house sales and market values will return to their regular levels.
Economic Stimulating Policies
But not all political changes wreck the housing market. Government actions can also stimulate the economy. Lowering interest rates and creating tax incentives are two examples of policies that can have this effect.
Man-Made and Natural Disasters
Man-made and natural disasters can cause a severe decrease in supply. It also causes an increase in demand from those now without a home. Surviving properties and those in unaffected adjacent communities can both see property values rise.
It may seem like the opposite would be true. Shouldn’t the people who just went through a disaster want to move to someplace safer?
It turns out that the people who live in disaster-prone areas are more resilient than one would think. Also, there’s probably a lot that they still love about the area.
Areas Become Safer
Plus, disasters are what spur on area developments. For example, a community may decide to build a higher sea wall that will keep the community safer. House sellers may also make homes more formidable to attract more buyers.
Different generations have different priorities. As members of new generations become homebuyers, different housing types and locations will become more popular than others.
For example, tiny homes are becoming more and more popular with millennials. They’re cheaper to buy and also cheaper to maintain. As money is very tight for millennials, it makes sense that they would want to purchase more affordable homes.
Another consideration is that fewer millennials are having children. So they likely won’t need larger family homes. These preferences can drive down house values.
How Do You Determine the Fair Market Value of Inherited Property?
Using different comparative properties is one of the most popular ways to estimate the fair market value of a home. As you’ll learn below, it’s fairly easy to value an inherited home with this method. However, there are also some other methods you can use to get your inherited property’s market value as well.
Sales Comparison Approach
The process of comparing real estate comps with your home is known as the Sales Comparison Approach. To perform this valuation, you first need to find some comparables. That is, you need to find properties that are similar in size, condition, area, amenities, and so on to your own.
You then need to find out what these homes sold for in the past. Collect all the data that you can. You may want to consider disregarding some properties that seem too different than your inherited property.
Out of these, you need to get an average property sales price. The price at which you set your inherited property should be close to that.
Use an Assessor’s Value
Remember the assessed value that this article mentioned earlier? Grabbing this can be a quick way to get a fair market value.
Just contact the local tax assessor in the area where the property is located. They can send you the tax records of the property. Either that or you may be able to look through the tax officer’s online records.
Keep in mind, though, that an assessed value may be a bit skewed. Property tax assessments usually only take place every three to five years or so. However, it’s free to get it.
Ask Real Estate Agents
You should get more accurate estimates if you talk to local real estate agents. They’ll likely even give you estimates for free in the hopes they’ll get your business. You can use a real estate agent to help sell your home, but that may not always be the best choice.
All they will need to do is perform a walkthrough through your home. They will then use their knowledge of the ins and outs of your neighborhood (i.e., the factors mentioned above) to create a written quote for you.
You should probably get a few different quotes. Some agents may give you inflated quotes so that you’ll become more desperate to sell your inherited home.
Get an Appraiser
Appraisers should give you the most accurate value of your home. They don’t have any reason to inflate the value of your inherited property. This is because you’ll pay them to get an accurate appraised value, which is likely very close to the fair market value.
Unfortunately, getting an appraiser is very expensive. Most appraisals cost several hundred dollars to hire. Still, this cost may be a necessary expense to get the most accurate valuation.
Is This Too Much For You?
Have you now calculated your inherited home’s fair market value? If so, you’ve only just begun on your home-selling journey! You may now want to:
- Hire a real estate agent
- Get a home inspection
- Have upgrades done
- Take professional photos
- Create a marketing campaign
- Get an attorney to help
- Review all of the offers
- Weigh all the closing costs
- Close on selling your property
This seems like a lot, doesn’t it? Luckily, you don’t have to perform all these steps. It may also not be a great idea to do so if you feel you won’t get back a high return on investment.
Plus, all of these processes are going to take a lot of time and expense to manage. You may not have any of this to spare. If you’re in this boat, there’s another option that you may want to consider.
Try a Home Cash Sale
Consider working with a business that can offer fair cash sales of your home. You won’t need to waste time looking for agents, dealing with paperwork, and doing all kinds of other long and stressful processes. Most cash-for-home sales companies can buy your inherited property in just a few hours.
Sell Your Inherited Home to Us Quickly
Now you know the answer to “How do you determine the fair market value of inherited property?” but it won’t be enough. To sell your home, you’ll need to do more work.
Are you looking for a way to quickly sell your inherited home for cash in Jacksonville, Florida? If so, consider selling it to us at Jax Home Buyer. We’ll treat you with respect, give you options, and refrain from pushy sales pitches.
No matter your home’s condition, we’ll buy it! Get a fair cash offer today by filling out the form near the bottom of this page.