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The most accurate way to determine the market value of a house is to use actual comparable sales. Comparable sales are recent sales of similar houses in the same or similar, nearby neighborhood. Before explaining how to use comparable sales, let's talk about what is best not done.
Do Not determine the fair market value of a single family home by: replacement cost coupled with depreciation, the income approach, the tax assessor value, asking your builder friend, asking the Tooth Fairy, calling your psychic, or throwing salt over your left shoulder while you guess at the value.
Do Not use anything you may have read about "replacement value," "assessed value" and "listed price." Using any of these will just create trouble. Tax assessments vary so much from each area to the next and each office has a different way of doing them. The information may or may not be current. Unless you are an expert on tax assessments in your area don’t try it. It is also dangerous to rely on the "Last Sale Price" of the house. The previous buyer of the house may have paid too much or too little for it and may be to far in the past to even be relevant. In determining market value, some people consider the "listed" or asking price of houses that have not yet sold. This is foolhardy at best. The only measure of market value is what a house sells for.
Using comparable sales to calculate value-
The best way to determine the market value of a house is to use comparable sales. If three identical houses in the same area recently sold for $85,000, $75,000 and $87,000, a forth identical house will sell within this same price range. That may be true but in the real world this is rare. Different houses in an area have sold for a wide range of prices, maybe between $65,000 and $110,000. Some houses are larger, or smaller. Some older, others are newer. Some need work while others are ready to move in. There is a solution to this problem.
First you must remember determining current market value is not an exact science. Like a Real Estate Appraiser, we must make an educated guess. What we need is the smallest range of prices that represents the value of the house. There are many ways to find comparable sales for an area. Some title insurance companies and private companies also provide sales data as a free or paid service. If the title companies do not provide this service, you can get sales information from the Multiple Listing Service (MLS). But you'll have to find a real estate agent to get it for you.
Working with sales data-
To determine the market value of a house, stay as close to the target house as possible. If possible, stay in the same neighborhood. When in a populated area, this is easy. If out in the country, you may have to look over several miles. Remember compare apples to apples. For a comparable sale to be useful it must be similar to our target house. What we are saying is that the house should be in a nearby neighborhood, also of similar size and age. In the Chicago area many records in the MLS do not contain the square footage for a property. Other means may be required to gain the information. You will need the address, age, selling price, date sold, square footage and the number of bedrooms/baths. With this information you have enough to start determining the market value of your target.
Here are some rules to follow:
1: Use only those houses that have sold within the past 6 months. Do not use properties that are over 6 months old. The market has changed.
2: Use houses in the same, similar, or nearby neighborhoods. Stay as close as possible to the target house. This is especially important in Chicago where you go a block or two away the price changes dramatically.
3: Always compare apples to apples. A good rule of thumb is to use houses built within 5 years of the target and within say 300 square feet of the same size as the target house. Do not forget to check the lot size for any large differences.
Cost per square foot
For each house that passes the rules, you will make one calculation. Calculate the cost per square foot for each house by dividing the sale price of the house by the number of square feet:
Sale Price / # of Square Feet
Do this for all of your comparable sales. When you are finished , you will have a range of figures. Now take these figures and arrange them from highest to lowest. Looking at the range, you can see that there is a difference in the price per square foot between the highest and the lowest. The point here is that we do not know why the cost of the highest and the lowest are out of line with the rest of our data. We are making an educated guess of the value for an average house in our target area. Instead of racking your brain trying to find out why why these houses are on opposite extremes of the range, lets take a simple solution. Cross off the highest and lowest figures from your list. Then forget about them for the moment. Remember we are looking for the average cost of a house in the area. There was something wrong with those two figures that would make our calculations off so just forget them. They do not help us. With the remaining numbers add them together then divide by the number of figures you added like you see below:
H1 + H2 + H3 + H4 = H Total
H Total / Number of Houses = Average Price per Sq Foot
Using the average price and the square footage for our target house we can determine the market value of our target house. These figures are based on the house being in average condition
Target House Square Footage x Average Price per Sq Foot = Market Value of the Target
Remember if the property you are looking at needs a lot of work or repair, your offer price should be adjusted accordingly.
If you are having an issue or would like some help with determining the fair market value of a target send an email to
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Disclaimer: The foregoing is not intended to be given as legal, financial or tax advice, but intended for instructional use only. If you require legal, financial or tax advice you should seek the assistance of a qualified professional.
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