Let's clear this up once and for all. There is only ONE way to determine the market value for single-family houses: Comparable Sales. Let me repeat: 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. This approach is called the "market comparison" method and is the method used by professional, licensed real estate appraisers for appraising single-family houses. 

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."- Warren Buffett

Assessed value

IGNORE, I repeat, IGNORE the "assessed value" of the house. Tax assessments vary dramatically from one area to another. Each Tax Assessor's Office has its own individual approach to assessing the property within its jurisdiction.

The information is rarely current. This approach may or may not have any bearing on the real market value of the property. Never rely on assessment and tax information to determine current market value unless you are an expert on tax assessments for your area.
Last sale price
Like tax assessments, 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. You have no way of knowing. Moreover, the Last Sale Price is an event that occurred much too far in the past to be relevant to the current market value. It is safest to ignore this information as well.
Real estate agents and "listed" price
You should always do your own market value analysis. Never rely on the agent's opinion regarding market value. Your own opinion will be much more accurate once you have learned the correct way to determine market value. Although real estate agents learn to calculate market value, they also learn to unduly complicate matters. Some of this can be dangerous to your pocketbook.

For instance, in determining market value, many agents 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. Period. 
Using comparable sales to calculate value
The most accurate way to determine the market value of a house is to use actual comparable sales. In theory, if three identical houses in the same neighborhood have recently sold for $80,000, $78,000 and $81,000, a forth identical house will sell within this same price range.

The market value of the fourth house, therefore, is between $78,000 and $81,000. The problem, however, is that in real life this happens rarely.

More likely, you will find that different houses in an area have sold for a wider variety of prices, perhaps within a range of $59,000 to $100,000. Some houses are larger, others smaller. Some are older, others newer. Some need repairs, others are perfect.
The asking price may be inflated for several reasons. First, some sellers just want to test the market to see what they could get for the house if they really wanted to sell it. They may not even intend to sell the house. Second, some sellers are unrealistic. They are in love with their house and won't sell it unless they can get what may be a wholly unreasonable price.

The listed price also may be inflated because of the real estate agent who obtained the listing. Real estate agents compete vigorously with each other to get these listings. The agent who has the listing earns a commission when the house sells, even if some other agent actually sells the house.

The agents who make the most money are usually the ones who can get the most listings. Therefore, some agents are tempted to "stretch the truth" when they tell the home owners the market value of their home. They want to convince the sellers that their house will sell for more if they will list their house for sale with the agent's company.

Once the agent gets the listing and the house doesn't sell for this inflated price, the agent will persuade the sellers to lower the price. The price might be lowered several times before it actually sells.

The price of a house listed for sale with an agent may also be inflated because a real estate commission must be paid. Commissions vary from state to state and are usually between 5%  to 10% of the sales price.
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The big three...
While many factors come into play when you're evaluating a residential property's value by "comps" (comparable sales), the three key factors are location, size (square footage) of the home, and the number of bedrooms and bathrooms.

Obviously, you'll need to look at many other aspects before you can pinpoint the exact value of a property, but these are the "big three." You should be able to look at comparable sales involving properties with these three factors and get a good idea of the value of the property you're selling.
1. Location
Location is extremely important when you're comparing sold properties. A professional appraiser typically looks at houses within a one-mile radius or less, and so should you. In the case of a subdivision, where the houses are all similar and built in the same time period, you need to compare similar houses with similar styles in the same subdivision to get an accurate valuation.

If there's a wide mix of properties in the subdivision, you may need to go outside of it to get comparable sales. Just be careful with "dividing lines." Geographic lines such as opposite sides of the river, the park, or a main highway can be invisible dividing lines that put the property in another school district and may not garner equitable comps.
2. Size
When determining a home's value, be sure to evaluate the square footage. Note that appraisers typically look at homes that are within 20% up or down in square footage as comparables. Generally (especially within a subdivision), most homes fall within a fairly limited size range. Therefore, you should be able to develop a good gauge for the selling price of homes in those particular sizes.

Of course, not all square footage is created equal. Most people think that if a house has 1,000 square feet and is worth $100,000, then the 1,100 square-foot house next door would be worth $110,000. Wrong! The extra 10% in square footage equals only a few percentage points in value. If these two houses offer the same location, style, and number of bedrooms and baths, the 10% additional square footage won't change the valuation much.

Why? Because there is a fixed cost on a house based on the value of the land, cost of construction, sewer, subdivision plans, and other factors. An extra few hundred feet of space involves very little cost--only wood, nails, carpet, and possibly some minor electrical and plumbing costs.
3. Bedrooms & bathrooms
The number of bathrooms and bedrooms is more relevant than simply the raw square footage. In other words, a three-bedroom home with 1,200 square feet might be worth more than a two-bedroom home with 1,250 square feet. It also matters where the bedrooms and bathrooms are located--on the main floor or the basement.

While finished basements can add value, the amount of that value is less than it is for above-ground living areas. Plus, this greatly varies depending on different regions of the country. In humid areas, below-ground living space isn't as valuable to homeowners as in dryer areas of the country.

To determine a home's value using comps, also look at the quality and number of bedrooms and bathrooms. Three-bedroom homes are generally a big plus over two-bedroom homes, but four or five-bedroom homes don't add as much over a three-bedroom if they are roughly the same size in square footage. Likewise, two bathrooms is a big plus over one bathroom, but three or more don't add as much value.

When comparing bathrooms, make sure you understand the different types of bathrooms and compare them correctly. A full bathroom includes a shower, bath, toilet, and sink. A three-quarter bath has a shower but no tub, plus a toilet and sink. A half bath has a toilet and sink but no tub or shower.

A three-quarter or full-bath create roughly the same value, particularly if another bathroom in the house has a tub. A half-bath has less value unless there are enough other bathrooms in the house. Also, a five-piece bath (separate shower and tub) generally wouldn't add more value than a regular full bathroom with a combination shower and tub.

There are other factors to consider that affect the value of a home, but generally you'd give these less weight than the location, size, and number of bedrooms and bathrooms. Some houses have one-car or two-car garages, some have carports, and others have neither. The garage factors in some value, depending on the rest of the neighborhood.

For example, if the neighborhood comps all have two-car garages, this can affect value as much as 10% on the subject property if it only has a one-car garage or no garage. However, if the houses are all small and there's a mix of garage options, the garage won't be as big of an issue. Likewise, a four-car garage in a three-car-garage-neighborhood probably won't count for much either.

One exception is with condominium developments. Parking spots or garages are generally sold with condominiums and can have substantial value, particularly in large cities where parking is limited to the street.

In addition to looking at properties sold in your target area, you need to look at properties that are for sale. While asking prices are not sold prices, it will give you an idea where your local market is heading--up or down. Also, keep in mind that if your strategy is to flip the property, the properties for sale are your direct competition and thus the asking prices are very relevant.

For example, if you find properties that have sold for $150,000, but the current inventory on the market is prices at $140,000, the asking prices of your competition become just as relevant, if not more, as the sold prices of other homes.

If you regularly invest in the same neighborhood, take some time to build yourself a "due diligence" notebook of properties that have sold, are under contract, and are for sale within your area. 

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  1. Good post, well put together. Thanks. I will be back soon to check out for updates. Thank you so much. Keep up the good works.
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