Tuesday, February 8, 2011

Could the IRS be right?

The IRS defines Fair Market Value as follows: "Fair market value (FMV) is the price that the property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts."

I think they nailed it.

I do a lot of CMAs in my business. CMA, Comparative Market Analysis, is a report used to assess the value of a property. CMAs rely on recent solds, pendings (homes under contract but have yet closed), pending inspection (homes that are under contract and are in the inspection period), and actives (on the market but not under contract-these are less important as they do not tell us what a buyer will pay for the property).

Based on the comps of like sq. ft., building styles, neighborhoods, quality of build and level of finished materials, you can determine the value range for a property. Combine that with a comparison of assessed value-to-sold ratio and you have a pretty good idea of what the house SHOULD sell for.

Sounds pretty neat and tidy, doesn't it?

Of course, then there are the companies that do the calculating for you! Now you won't hear me say I don't like Zillow. I think there is a place in this market for everyone. But it's important to keep in mind that companies like Zillow provide estimates, Zestimates in their case, based on county tax data. I will tell you one thing, my home is listed as a 2 bedroom, 1 bath home on the King County Tax Records while in fact it is a 4 bedroom, 2.5 bath home. Their Zestimate won't even come close to the real value of the home. So why aren't tax records accurate? I have lived in this house for over ten years and never has a city assessor popped in for a tour.  Much of the upgrades to the home didn't require a permit (a way the city can track upgrades) and I am certainly not about to call them up and deliver the 411.

But I come back to the IRS's definition of 'an agreed on price by a willing buyer and a willing seller'.

None of the above reports begin to factor in the human element. What if at that point in time there was an increase in the number of buyers and a short supply of homes in your area/price range/home style and size? Or, on the other hand, what if there were no buyers for months but one? Don't those factors play a role in the final price? How about the seller who just digs in his heels and says "No!  I have lived here for 42 years, I raised my five children in this home, Ethel died in this home and I am not budging!" (yes, I have heard that before).  What if this one buyer, who just inherited some money decides it is not worth the anguish of upsetting this dear old man and pays an extra $15,000 for the house. Now not every one would do something like that, but some (and I have represented them) do. Data in doesn't always represent good data out, because none of these specifics are reported with the sale of the home.

You can see how a range is created due to varying factors, none related to duress to act.

So, unless you know the story, unless you have stepped inside the house, unless you understand the human side of the transaction or the market, you really can't place an exacting price on a property.  Yes, average price per sq. ft., assessed value, etc. are nice to know, but it really comes down to what price are you willing to buy it for, what price are you willing to sell it for, and finally can you agree?

I always say, real estate is a real market, but a commodity it is not.

Until next week,

la chasse au bonheur


  1. About your house assessment: if an assessor ever *was* to come by and "pop in for a tour," don't let him in! You don't have to. They can sneak around outside but they can't come in. The assessors will re-assess when you sell your house. Until then, enjoy your underassessment :)

  2. You are right Eileen, they will re-assess based on the sold price but they still might not update the tax records with the correct information, i.e. correct no. of bedrooms, bath, sq. ft., etc. Thanks for the input!