So you want to know what your home is worth!!! Maybe you are thinking of purchasing a new home, or maybe you are doing some estate planning, or maybe you are preparing a financial statement for your banker – or for whatever reason.
Some people will tell you that your home has different values – really??? For instance if you plan to sell your home in order to buy a new one of course you want as much value as you can get. Or, if you are preparing a financial statement you will also want the value to be high. But what if you are seeking a reduction in your tax assessment? Then of course you want the least value.
Remember this though. For whatever reason you are determining the value of your home – it is worth what a willing buyer is willing to pay in an unbiased market assuming the buyer is not under any undue influence.
Here are two terms you should keep in mind when valuing your home. Chronological age and actual age. Actual age of course is the age of your home in years. Chronological age is the age your house would be if it has been kept up to date. For instance you have a home that is 30 years old. Never been touched. Same carpet, cabinets, etc. as day one. Actual age and chronological age are the same – 30 years. On the other hand you have a home that is 30 years old but you have kept it up to date. New carpet, new cabinets, & counter tops etc. Actual age -30 years but chronological age-10 years. It can make a difference in the value of your home.
So what is the process to determine the value of your home? Given what we said above about a “willing buyer in an un biased market” your home will be worth what “willing buyers” have paid for similar homes in the last 12 to 18 months that have been adjusted for differences.
So let’s make this as simple as possible. Let’s say that you live at 101 “A” street (we will call this the subject property). You have a 1000 square foot ranch home built in the 70’s that is in average condition. It has one bath, an attached garage, and 500 square feet finished in the lower lever – average finish. You never really did much to it over the years; in fact you never even put in central air.
Now let’s say at 102 “A” street there is a house that sold recently (we call it a comp or comparable property) – about 6 months ago. It is a 1000 square foot ranch built in the 70’s that is in average condition. It also has one bath, an attached garage, and about 500 square feet finished in the lower level – average finish. This house also does not have central air (must be your brother). All other physical aspects of this comp are the same as your house. The sale price of this recently sold comp was $125,000.00. And then on “B” street just a block away same scenario but this house sold for $128,000.00.
Based on the above then you would estimate the value of your house in today’s market somewhere in the area of $126,500.00
So how many times does this happen?? Almost never. In fact in my 45 years in the business I have never encountered a situation like this in estimating the value of homes.
So here is how the process works. You look for comps similar to your home– and you should try to find at least three. You list all of the physical amenities of your home (and there are quite a number of them) and compare them to the physical amenities of your selected comps. Then you make plus and minus adjustments to the price the comps sold for, for those differences. An example- one of the comps you have selected to compare your home to has a fireplace and your home does not. This comp. sold for $125,000.00. So, you make a minus adjustment to the comp sale price for the value of the fireplace. You say why would I adjust the comp when I am trying to establish the value of my home? You know the comp sold for $125,000.00 so you subtract the value of the fireplace (let’s say $2,500.00) from the sale price of the comp to account for that physical difference. At this point you don’t know the value of your home (that’s what you are trying to find out) so you cannot adjust your home. So if every other physical aspect of these two homes is exactly the same, then the indicated value of your home, given this particular comp, would be $122,500. If it were the other way around and your home had the fireplace, and the comp did not, then the adjustment to the comp would be + $2,500.00.
So the rule is when making adjustments you always adjust the comp. never the subject. Ask yourself- “how do I make the comp like the subject to adjust for this particular difference”.
How much do you adjust each difference? This is the tricky part. In most cases the tendency is to over adjust. This is where experience is required and you really can only get that kind of experience if you are exposed to the market on a day to day basis. Enough said about that.
There can be reasons to make adjustments other than “physical differences”!!! One important one would be for “functional differences”. For instance, a comp with three bedrooms where you have to walk through one bedroom to get to another is less functional and would require an adjustment.
And then there is a final adjustment that may need to be made. I call this the “market savvy” adjustment. Because of market knowledge and expertise a professional will know if there would be a reason to make a final adjustment. If you are not a professional who is in the market on a regular basis you will probably not know to make this type of adjustment.
Valuing your property is not always the easiest thing to do. Hopefully now you will have a basic understanding of how the process works.