What Is a Home Calculation?

A home calculation is simply the "worth" of a home -- with the definition of worth and how the home is being evaluated being the key factors. Let's explore three types of home evaluations and what they mean.

 

Fair Market Value

When determining the "fair market value" (FMV) of a home, one takes into account how much a ready, willing and able buyer will pay for that property in the current market. Real estate agents often look at sold homes ("solds") in their databases to determine how much a buyer in the current market will pay for a listing similar to the one they are trying to move. Realtors then base their listing price for a home, in great part, on those numbers.

Real estate professionals call these comps, or comparables. Savvy agents look primarily at homes that have recently sold -- not those that are listed at a certain price, or that are still under contract. "Solds" tell the tale of how much a purchaser will pay to buy a comparable house in the current market and neighborhood.

This type of home evaluation is called fair market value. FMV is often used as the listing indicator for real estate professionals when determining a property's sticker price.

 

Appraised Value

Appraised value is a different ball of wax.  Appraisers take into account recently sold homes, within that same neighborhood, with comparable physical features. They also perform detailed inspections and evaluate other information (i.e., improvements, lot size, fixtures, sometimes Census data, and more).

Banks and mortgage companies order appraisals to determine the "collateral" value of a home. Since most buyers use mortgages to finance a home, the lender will want to be assured the collateral, which is the property, is sufficient in value to cover the amount of the loan.

Homeowners also order appraisals to determine how much equity they may have in a home.

This type of home evaluation is called appraised value.

Note that these values can change from appraiser to appraiser. Though hard rules are used to ascribe value, many factors are open to interpretation when determining worth -- and individual interpretations can often differ.

 

Fair Market versus Appraised

The difference between appraised and FMV is slight, but important. Fundamentally, the fair market worth of a property is the amount a typical buyer, in an arm's length transaction (i.e., two strangers, versus a parent and child) is ready, willing and able to pay for the property today.

On the other hand, a formally appraised amount is an unbiased valuation of real estate based, in part, on a completed, independent inspection, and other area data.

 

Assessed Value

Let's throw another type of home evaluation into the mix: assessed value. This type of valuation is performed by counties across the United States.  Municipalities value a home for reasons other than the two above; and their research is used differently.

County valuations are measured for property tax collection purposes. They are performed strictly to figure out how much is due and payable annually by the homeowner to the tax collecting entity.

Here's how assessed value is generally determined: Often, the county's initial valuation is set using the amount the property sold for the year prior. After a few years, the municipality will apply a millage rate, or tax rate, to that assessed amount, which is generally measured in tenths of a penny.

For example, a millage rate of 5 mills would equal 5 tenths of a penny. If a home's assessed value is 250,000, (and the homeowner is taxed on 100% of the assessed value, the county would multiply $250,000 by the millage rate of .005; hence, annual property taxes would be $1,250 for that home.

Note:  Millage rates are set based on various areas within a county. Also, homestead exemption and other factors determine to what percentage (of the assessed value) the millage rate is applied.

The general consensus is millage rates are set based on how much in property taxes a municipality needs to collect, overall, to stay within its budget. So millage rates or tax rates will vary.

The difference between appraised value and assessed value is this:  a homeowner can challenge a county's assessment of their property, using a formal process; whereas an appraised value generally stands.

 

For More Information

FMV:  To find a licensed realtor to help you determine the fair market value of your home, visit your state's real estate commission website. (Tip: Use a search engine like google.com and enter "your state's name" and "real estate commission.")

Outlined above are three different types of home evaluations as it relates to property worth. They are all different, but inherently connected and affect how we value real estate today.

© 2017 MLSListings Inc. All rights reserved. Based on information from MLSListings MLS as of April 24th, 2017 at 9:55am CDT.
All data, including all measurements and calculations of area, is obtained from various sources and has not been, and will not be, verified by broker or MLS.
All information should be independently reviewed and verified for accuracy. Properties may or may not be listed by the office/agent presenting the information.