How to Value Your Home
What is your home worth? Placing a value on your property can be an emotional experience. Unfortunately, the market place only recognizes one type of value – market value not emotional value. In this article, we will discuss how to determine your home’s value.
Appraised Value. A formal appraisal consists of three approaches to value – Cost approach, Income Approach, and the Market Data approach. For residential properties, the income approach is not very relevant. The appraiser will estimate the cost to build a similar house new then depreciates the improvements based upon the age and condition of the improvements. To this, they will add land value to arrive at indicate value per the cost approach. The most relevant approach to value is the market data approach, which examines the sales price for similar properties. The appraiser then decides which approach is most relevant, makes appropriate adjustments, and decides upon a final value. The report will reflect one person’s opinion of value. The opinion is respected due to the credentials of the appraiser. However, it is still one person’s opinion.
Real Estate Agent. Your agent should provide you with a CMA (comparative market analysis or competitive market analysis). The CMA utilizes the same approach to value as the ‘market data’ approach used in a formal appraisal report. The CMA will contain recent home sales and homes currently on the market. With little effort you should be able view online pictures of these properties. Properties within the CMA are known as comparable properties or comps. Each comp should be evaluated for things such as: (a)Time of Sale (b) Condition (c) Design (d) Square Footage (e) Bedrooms (f) Baths (g) Family Room (h) Basement (i) Upgrades (j) Car Storage (k) Lot (l) Terms of Sale (m) Lot Size (n) Age of Property (o) Upgrades (p) Any other features unique to your property or community.
The agent should be familiar with market factors influencing property values within your community. Your agent will make a value recommendation of value based upon the CMA data. Do not shoot the messenger. Too often, sellers will select an agent to represent them because the agent told them what they wanted to hear. We suggest you evaluate agents based upon their honesty and knowledge.
Assessed Values are not always a good indication of market value; however, they can be used as a reference point. If comparable properties have sold for 125% of assessed value, then 125% of your assessed value would be an indication of value.
Price Per Square Foot Gross. This short cut calculation includes house and lot so some caution should be taken to include comparable properties with similar lot sizes. If recent sales indicate an overall value (house and lot) of $300 per square foot and your house has 2000 SF, then your home is probably worth around $600,000.
Price Per Square Foot Net. In this calculation, we will subtract the value of land from our comps. The easiest way to estimate land value is to review assessed value data. You can either use the assessed value of the land or calculate the percentage land represents to overall assessed value. The assessments show that land represents 35% of value thus improvements (the house) and represent 65% of value. Take 65% of the sold comps value and divide by the square footage (comps). The result indicates a price per square foot of the improvements. Multiple the price per square by the number of square feet of your home to obtain value for improvements. Next, add land value to arrive at total value.
Price Versus Value. In reviewing comparable sales, you should understand the price a home sold for doesn’t necessarily indicate that was the market value of the property. The seller may have been in a financial difficult position and sold for less than market value. On the other hand, a buyer was willing to pay more for a property to be adjacent to their parents.
Terms of Sold Comps. The ‘terms’ of recent sales may have a dramatic influence on the price paid. One comparable property sold for more money; however, the seller paid a portion of the buyer’s closing cost. Another property sold for far less but upon closer examination you find the seller sold the house ‘as is’ without any inspections and a very fast closing. In recent years, some communities experienced an unusual amount of bank foreclosures which were eventually resold in the market. Due to the numbers, many appraisers used these sales as comparable sales, without adjustments, creating a negative impact on home prices within those communities.
Value in Exchange. Your property may have certain amenities or upgrades which cost a great deal of money. How much additional value did those amenities add to your property? A couple examples would be a $40,000 kitchen upgrade or a $50,000 pool in a community of $200,000 homes. These are examples of ‘Value in Use versus Value in Exchange’. They were valuable to the owner but will not increase the value as much as the improvements cost.
Objectivity. You and your agent should remain objective and not impose too much emotional value when arriving at the asking price for your property. Memories are great but do not add value to your property.
Time of Comp Sales. How old are the comparable sales? How much have market conditions changed since the date of the comparable properties? A significant drop in mortgage interest rates could have a dramatic effect on property values in a short period of time.
Location of Comparable Properties. Yes, the value of real estate really does depend on 3 factors – location, location, and location. Similar sized homes in different communities, within one mile distance, may well have extraordinary different values.
Homes on the Market. These properties will be your market competition. Until they sale, they will have a direct influence on the marketability of your property. Of course, the influence will be either positive or negative.
Available Properties. How many comparable homes are currently on the market? Is there an abundance or shortage of housing inventory? This is not limited to your immediate community but rather an assessment of homes available in similar price range.
Days on Market. On the average, how long were the comparable sold properties on the market before they sold? How long has the current inventory been on the market?
Market Conditions. Are current market conditions more favorable to home sellers or home buyers? General economic conditions play a major role in the housing market. The corona virus had a major impact on employment and a drag on the economy at large. However, historic low mortgage rates motivated buyers thus the housing market thrive during the pandemic.
Concessions. Are you willing to contribute to buyer’s closing cost? Are seller concessions expected for properties in your price range? Can you increase your asking price to offset possible concessions?
Time of Year. Is the season favorable to selling your property? Is the seasonal consideration offset by other factors such as low mortgage rates or a shortage of available houses?
Terms of Sale. Every real estate transaction is composed of four (4) different items. They are (1) Price (2) Terms (3) Time and (4) Chattel. Suppose a seller offer 100% owner financing at below market interest rate. This seller should expect a fast sale at their asking price. Of course, the example is extreme, however, the point being that the terms you offer are important. Your real estate agent will suggest the appropriate terms for your property is attract buyers.
Asking Price. After you and your agent have digested all the applicable data, you must arrive at the ‘asking price’. If the market conditions are favorable for sellers, then you may ask a little more. This experience repeated in the market creates appreciation in the housing industry.
Opinion Not Science. You should always remember that value is an opinion. The market place will ultimately decide the final value.
As you can see placing a value on your property can be very complex.
An experienced real estate agent is required.