What are the Key Elements Of Home Valuations
You’re probably familiar with “supply and demand.” It’s covered in every basic economics class, and we run into it all the time in our daily lives. When there’s plenty of something, it costs less. The primary reason fast food places are able to sell you entire “value meals” for $5 or offer “dollar menus” is because they make thousands and thousands of the same basic item every day, all over the country. If you don’t buy theirs, you have a half-dozen other options – possibly on the same block. If they try to charge you $20 for a greasy burger and cold fries, you’ll simply eat somewhere else. That’s supply.
Of course, there also has to be demand. Those same fast food places could offer a splintered piece of wood with ketchup on it and a handful of packing peanuts instead and probably wouldn’t sell very many. Supply and demand work together to raise or lower costs – whether it’s lunch, the home you inherited from your parents, or that row of townhouses you’d like to rent out. If there are already a dozen homes for sale in your area, most similar to yours in many ways, it lowers everyone’s house worth. If you live in a growing area and there simply aren’t enough homes on the market to meet demand, it bumps up the market value of home options as soon as they appear – any home options. When there’s demand, prices rise.
There are two less obvious considerations that make perfect sense once we think about them. The first is usefulness, or “utility.” The easiest way to think of this is as a combination of location and condition. Is the property somewhere useful or practical for potential buyers’ purposes? Is it in good enough shape to be used for those purposes or will it require substantial repairs or remodeling? If you’re thinking about opening a café, the corner spot in a high-traffic area which already has a commercial kitchen, small office space, and a dining area with a built-in bar has great utility for you. The same space would be far less appealing to someone needing warehouse space near an airport.
The last factor is transferability. This isn’t usually an issue when you’re trying to get home value estimates. If you’re wanting to sell your home, you know whether or not there are reasons you can’t. If a home is on the market, it’s presumably free of liens or other restrictions. Commercial property can be a bit trickier. Are there codes or laws which could prevent you from taking ownership or using the property the way you intend? The more difficult it is to gain ownership and start doing what you planned with the property, the less value it has.
How Do I Find Out Property Values?
There are three basic ways to check property value or estimate current home value.
The Cost Approach -
This is the method your insurance company is likely to consider above the others. It basically considers what it would cost to replace the entire property from scratch as of today, minus depreciation based on the age and condition of the existing property. If this sounds familiar, it’s because you’ll find similar language in most vehicle insurance policies. Evaluators look at the cost of the land itself, the building materials currently used (or comparable, more modern materials), and the approximate cost of labor. If there are comparable properties nearby built more recently, that makes things even easier, since a costs-per-square-foot can be calculated and applied.
The Income Approach -
This is most common when valuating commercial property or considering rental property. What would it cost to keep this property in usable condition, pay for essential utilities and mandated taxes, and otherwise take care of it? How much income could most likely be derived from this property over time? Subtract the potential income from the estimated costs, and you have your estimated profit margin. It sounds easy until you start to consider all of the factors which could impact the cost of upkeep or the income derived from the property over time!
The Sales Comparison Approach -
This is the one with which most of us are familiar. It’s the first thing most realtors will research for you. This approach bases home valuations on the most instinctive factors – the “supply and demand” we talked about above. Realtors do a home value search on “comparables” (or “comps”) – homes which are mostly like yours and located in your basic area and which have sold recently (or which are still on the market not selling). This is also what those nifty home search and home value websites do – along with their 3-D virtual tours and such.
So, if you’re looking to sell a house that’s about 20 years old, almost 2,000 square feet, 3 bedrooms, 2 bathrooms, a new fence around the back yard, and with both a furnace and hot water heater still under warranty, needing a little work on the front porch and fireplace, and with minor water damage in the basement, all you need to do is find three or four other homes matching that description which have sold in your neighborhood in the past six months and run the numbers!
How Do I Get The Most Accurate Home Value?
Of course, it’s never quite that simple. We can talk about estimates all day long, but accurate home values aren’t determined by those nice full-color printouts your realtor brought over. The most accurate home value site out there is just doing the same sort of guesswork they are, only automated.
Even if you agree on a price with a buyer, if that buyer needs financing, their lender will demand a detailed appraisal before approving their mortgage. For lenders, inaccurate home valuations can mean they lose money. If homeowners are unable to make their payments and they’re left with a property worth less than what’s owed. They may loan millions of dollars each year, and that means they want the most accurate home value available each and every time. They don’t look at comparables or even replacement cost. They hire a professional appraiser.
A certified appraiser examines the neighborhood and surrounding area to determine the extent to which location will raise or lower the market value of home options in the area. (Yes, they consider comparables as well.) They walk the property and take careful notes (there’s actually a really long, detailed form for this), as well as plenty of photos. The property backs up to a nice walking path? That adds X amount of dollars. Looks like some minor wood rot along that back corner. That subtracts Y dollars from the total. They’re not guessing or comparing, and they have nothing to gain or lose whether the house is sold or not. Their job is to be specific and accurate, and that’s what they do.
Next they walk the inside of the home, just as methodically. That’s a nice bathroom off the master bedroom – looks recently remodeled and old plumbing was largely replaced. This guest room has some sketchy carpet, though – looks like pet stains and there is a slight odor. Every square foot, every nook, every plus and minus – they’re all noted and included in the calculations. Given that every home is different in a hundred different ways, it makes sense that this is the only way to produce truly accurate home values. It’s unbiased because they have no interest in the transaction itself, nor are they legally allowed to. Home valuations are their business, so when they check house value through a detailed analysis, that’s all they’re concerned with.
