How much is a house really worth? The short answer to this important question is “as much as someone will be willing to pay for it.” That’s not very helpful for current homeowners who are considering placing their properties on the market and need to know what to expect, though.
Setting the price too high can lead to an unacceptably long wait for a qualified and interested buyer. Setting it too low, on the other hand, can wind up leaving property owners struggling to pay for the expenses associated with moving to their new homes. Those who choose to ask a professional will likely get a different answer depending on whether they ask tax assessors, real estate agents, or lenders. If this sounds like a recipe for stress, readers should also note that there are a few different ways that they can assess home value independently.
Thankfully, there are plenty of tools at homeowners’ disposal for calculating the fair market value of their homes so there’s really no need for them to make their decisions based on others’ estimations. This guide will outline a few of the ways to calculate home value and a few of the reasons that homeowners may want to do so, whether they’re planning to sell in the immediate future or not.
Use Online Valuation Tools
There are dozens of home value estimators available online, which helps to explain why almost a quarter of all homeowners use these tools to determine their properties’ worth. How do they work, though, and which one is best? Read on to find out.
The technical term for home value estimators is actually “automated valuation model” (AVM). AVMs use public records such as deeds, tax assessments, and property transfers to predict home value based on listing prices and actual home sales in the searcher’s area. Not all AVMs are created equal, though.
The AVMs featured on real estate sites like Zillow, Redfin, and many others are designed more with lead generation and marketing in mind than accuracy. Since these AVMs return values for pretty much any property, even those that are located in neighborhoods nearly devoid of publicly accessible data, they aren’t very accurate.
The automated valuation models used by lenders, on the other hand, are quite different. They use complex mathematical modeling to provide not just an estimated market value but also a confidence score. This score determines how close the estimate should be expected to be to actual fair market value.
While checking a property’s value with a professional-grade AVM can give homeowners an idea of what their homes are worth, it doesn’t replace the insight offered by real estate experts. It’s a good first step to take, but sellers shouldn’t consider it the final say on what they can expect to get for their properties.
Use the FHFA House Price Index Calculator
Homeowners who are wary of taking the home values obtained through AVMs at face value may want to look into the Federal Housing Financing Agency’s house price index (HPI) calculator. This tool offers a more accurate value than the majority of AVMs.
The FHFA’s HPI calculator uses what’s known as the “repeat sales method.” Since the FHFA has been tracking mortgage transactions since the 1970s, the agency has been keeping track of changes in home value for individual properties across the country from one sale to the next. All that data can be put to good use to help homeowners get a better understanding of their properties’ current values by estimating how they might fluctuate in current markets.
It’s important to note that the HPI calculator provided by the FHFA looks specifically at conforming home mortgages and is not adjusted for inflation. It’s equally important to note that real estate markets tend to fluctuate with the seasons, which isn’t accounted for in the estimate provided by the calculator.
Ask for a Broker Price Opinion
A broker price opinion (BPO) can be obtained from a local real estate agent. This opinion will combine the agent’s evaluation of the home and his or her evaluation of the current market to provide a reasonably accurate home value. They may not be as detailed as professional appraisals, but BPOs are accurate enough that many homeowners and real estate agents actually use them for listing purposes.
Ask for a Competitive Market Analysis
A competitive market analysis (CMA) can also be obtained by contacting a local real estate agent. Unlike the BPOs described above, though, it focuses more heavily on recent sale values of similar homes. Both CMAs and BPOs can often be obtained at little or no cost to homeowners since real estate agents often use them as a means of attracting new clients.
Hire an Appraiser
Not all property owners realize that they can hire public appraisers to estimate the home value of a property whenever they want. While just about all lenders require appraisals prior to approving mortgages, only about 30% of U.S. homeowners use them to determine home value.
Professional appraisers take a few things into account when drafting reports and appraisals for their clients. These include factors like where the home is located, whether the house itself or the land surrounding it has been improved, and how other similar properties are faring in the same market.
Generally speaking, the estimates offered by professional appraisers tend to be more accurate than the tools that homeowners can find themselves online. They do come at a cost, though, since curious property owners will have to pay for the appraisals and reports out of pocket.
Perform a Self-Evaluation
Both professional appraisers and AVMs rely on recent sale values of similar properties to come up with estimated home values. Homeowners themselves can do the same, provided they’re willing to put in some fairly serious legwork. After all, the information used to come up with these estimates is all publicly available and most of it can be found online.
In the real estate field, comparable properties are often referred to simply as “comps.” Over half of all U.S. homeowners have pulled comps in order to get a better idea of the value of their own properties. Checking out similar properties may sound like a fairly straightforward way to estimate home value, but the reality is that it can actually be fairly difficult to choose accurate comps.
The best way to ensure that readers are drawing accurate conclusions from the available data is for them to think about what properties prospective buyers might be interested in if their own homes weren’t on the market. Most prospective buyers would be considering factors like size, location, condition, and upgrades to the property when they sought out other homes.
There are a few ways to get started choosing comps. The easiest is to head online to a local MLS service and look for similar properties in the same neighborhood that have recently been sold. In some cases, readers will be unable to find enough information on recent sales to make this approach useful.
When this happens they can also check listing prices. However, it’s important to remember that listing prices don’t necessarily reflect the actual price that homes will fetch on the market once they sell.
Estimating home value using this approach requires homeowners to find a minimum of three valid comps. They should all be similar enough to their own properties to warrant assuming that they will fall into the same price range. Homeowners will also need to adjust for differences such as the number of bedrooms or recent renovations.
It can be extremely tricky figuring out how much to add or subtract from the comp price since the price difference will depend on local market conditions. With a little bit of legwork, though, homeowners can use this strategy to get at least a rough estimate of how much they can expect their homes to be worth.
Why is Determining Home Value Necessary?
Homeowners who are considering putting their properties up for sale can use their estimated home values to determine what they can afford when moving to a new home. They can also use them to decide how to price their homes or evaluate whether their real estate agents’ suggestions are appropriate. Potential sellers aren’t the only homeowners who might want to check their home values, though.
Readers who want to refinance their homes or take out home equity lines of credit will also benefit from having an estimate of their home values. Insurance companies and tax assessors also use their own systems for determining value to decide what rates to charge or how much a property is worth for the purposes of charging property taxes.
Those who choose to take active steps toward estimating their home values in advance can often appeal their property taxes or insurance rates. They’ll need to be able to prove that the assessment is too high, of course, but this can be accomplished by pulling comps as described above. The bottom line is that homeowners who have a better idea of what their properties are worth will have greater control over their finances, whether they choose to sell or not.