How to Determine the Value of Your Home

These days, it’s important to know how to determine the value of your home. In most households, a home is the most valuable asset. That being the case, most of us are pretty concerned with how much it’s worth. If nothing else, knowing the property’s value is important when determining if you should pay off your mortgage or not. With so many homeowners being underwater on their mortgages—or very close to it—the value of your home may be a bigger concern now than ever.

There are good ways to determine the value of your home, and plenty of not so good ones. And understanding home valuation is no less important for those going through the process of buying a home too. That’s why I think this subject is super important.

Common valuation mistakes

Let’s start by considering the most common—and most unreliable—valuation methods in use:

• A friend’s opinion.This source may be well intended, but not at all reliable. And certainly nothing you can bank on.
• 2007 prices.Peak price levels are hard to let go of—somewhere in our minds, the last peak defined “normal prices”. But they’re gone and it’s time to move on.
• The highest sale in the neighborhood.We all want to believe that our home “should sell” at the top of neighborhood price levels, but it’s not usually true. The high price of that sale could have been the result of an exceptional property or even a non-arm’s length transaction. More likely, your value will fall somewhere in between the highest and lowest sales in the area. This valuation mistake is often repeated by those who want to sell their home themselves.
• Based on a nearby home that sold over a year ago.When appraisers look for comparable property sales in the area, they generally make sure that they sold within the past six months. A property that sold 18 months ago for a value well above the general price level will be ignored. For the most part, any sale over one year old will be considered ancient history.
• Your own ballpark estimate.This is no better than your friend’s opinion as to what your house is worth.
• Tax records.There’s a correlation between a property’s tax value and it’s market value, but it’s usually loose and very dated. Tax authorities try to maximize tax revenues and one of the ways to do that is by assigning optimistic values. Never bank on tax value as your property’s market value—they’re two very different numbers.
• A real estate agent’s opinion. On the surface this could be a legitimate estimate of value, but we have to remember that a) not all real estate agents are good at what they do, b) many only “moonlight” in the business, and c) they may be trying to get the listing on the sale of your house. One of the ways they do this is by giving you an inflated value—it makes you like them so much better.

What are legitimate sources to get the value of your home?

Neal’s notes – The value of your property is determined by how much someone is willing to pay for it. If you are selling your home and want to get the most possible, consider using an installment sale if you can. You’ll have captive buyers who may be willing to pay a much higher price for your property.

The local newspaper

Some local newspapers have a column that reports closed sales in the area. Recent sales in your neighborhood will give you a reasonable idea what your home is worth. Just be sure that you consider all closed sales in the neighborhood over the past few months, and not just the highest ones.

For what it’s worth, this type of reporting isn’t a violation of anyone’s privacy. The information is taken from legal recordings which are a matter of public record.

Online sources

There are also online sources and while they aren’t completely reliable, they can provide validation for other sources.

Zillow.com is one of these online sources. The site gives a value for every property in the area. I’m not completely convinced that it’s entirely accurate, given that while it may reflect the value based on general characteristics of homes selling in the area, it doesn’t (and can’t) make adjustments for property condition and specific features. Still, it’s a reasonable starting point.

Realtor.com is another site that has potential. It lists hundreds or even thousands of homes for sale in a given area, and in many areas it contains most of the properties for sale. It only reflects asking prices, but that can have value. You can also find out what the typical sale-price-to-asking price ratio is in the area to get a more precise idea on the value. A real estate agent or appraiser should be able to furnish this ratio. No matter what your real estate interests – even if you want to buy rental properties – this site is very valuable. Make use of it.

Realtor.com doesn’t provide closed sale prices, but the sheer number of properties listed can give you a solid idea what your house will be worth.

A competitive market analysis by a real estate agent

This is probably the most accurate picture of your home’s value that you can get without spending any money. It’s not unlike a real estate appraisal, though it is much less formal. Just like an appraisal, the agent will do a written report basing the value of your property on closed sales in the area, after making adjustments for features and condition.

A real estate agent can perform this analysis for you and they may not charge for doing so. If you are planning to list the house for sale, the agent will be very anxious to do the analysis. But if you tell them that you just want a value of the property they may charge you. Even if they do, it’s likely to be a lot less expensive than a formal appraisal.

A formal appraisal

If you need a reliable value for your home, maybe be for insurance purposes, or because you need to prepare a personal financial statement, you can order a formal appraisal. The cost for this is generally between $300 and $500 depending on where you live and the type and general price range of the property.

Appraisers have access to the data base of closed sales in the area and will base the value of your home on those sales. In the process, they’ll make adjustments for features in the homes, like square footage, room count, property size, energy efficiency and dozens more. These are not arbitrary adjustments but are based on common industry standards to insure that appraised values will come as close to actual value as possible.

Why use an appraisal rather than a competitive market analysis (CMA)? An appraisal is designed to establish value, while a CMA is oriented toward sale price. Depending on market conditions in the local area, the two numbers could be very different.

How do you estimate the value of your home?