Determining what a property is really worth in today's market can be challenging. Market conditions in some parts of the country seem to have house values slowly decaying every day. In a few pockets of the country house values are actually flat to rising in value but the problem of determining what a house can actually sell for at any given time can still be a challenge.



The traditional method of determining Fair Market Value (FMV) was with appraisals, still favored by lenders as the most "scientific" method of determining property values. The values determined by appraisers are based on comparable sales ("comps") in a given radius of the property. The distance from the subject house was for many years one mile but over the years it has been decreased by the lenders to 1 mile or the same subdivision, whichever is the closer to the house. An appraisal is an educated guess of what the house could sell for in a market that is not adversely affected by outside influences. Few of these markets exist now because of the lending problem and over-supply of housing inventories. Appraisals are required by lenders for financing approval on all properties.

For short sales and pre-foreclosure action, the Lenders use a Broker's Price Opinion ("BPO") which is a FMV estimate by a realtor of what the property can sell for. The realtors get paid half or less than an appraiser and the standard they use is comparable sales. Open listings and Days on the Market ("DOM") are not brought into these estimates unless there are very few comparable sales in a certain radius of the house. The over-looked values that should be included are the For Sale By Owner ("FSBO") properties that can sell at lower prices and still net out the same money because the owners aren't paying a realtor's commission and there is no way to test the motivation level of every property that's for sale. This motivation level is the culprit of declining home prices throughout the country.

A very motivated seller will sacrifice his home to avoid making additional mortgage payments, while on the other end of the spectrum, the un-motivated seller tells every perspective buyer, "I won't take a cent less than $____". Knowing that motivation is so important how is it possible for a seller or a buyer to determine which homeowner is the most motivated?

The best and only realistic way to accurately determine what your property can sell for is to find out what your competition is willing to sell their homes for and offer a perspective buyer a better value instead of trying to beat the competition based solely on price. It sounds simple and in fact it is when you take a systematic approach to finding not only what your competition is willing to accept but also what their house looks like compared to yours. The value of this method can mean your house selling in a few days versus months, and tens of thousands of dollars more in your pocket at closing.

So to get started, you must drive the neighborhood where your house is located and write down the address and telephone number of every house that is for sale by a Realtor, bank owned ("REO"), and especially the FSBOs. Next you will need to call every Realtor or owner and ask to see the house and once you are in the house, ask what they are asking for the property, and finally, what is the best price they are willing to take for a quick cash sale. Discount these prices by another 5% to get a final overview of what your competition actually is. Using these values you should be able to tell what to sell your property for to get out the highest price possible and in the quickest time.

Recently we called on a REO listing with a Realtor with an asking price of $249,000. When pressed about what the bank would accept, we were told $189,000. In the same neighborhood, a pre-foreclosure property in a realtor's hands was offered at $259,000, but again when pressed, the Realtor said the homeowner could take the $186,000 he owed plus the realtor's commission. These two homes will probably sell way below what would be expected by an appraisal, BPO, or any method except driving the neighborhood. Before you buy an investment property, make certain you know what the underlying distress sales are expected to bring that will drastically affect your house's price.