Determining a house’s value helps a property owner decide if it is good time to sell, to make home improvements or take out a loan against the property. What you paid for your home may not be close to its current value. It is possible for your house to be worth far more or less than what you initially paid.
Definition of Value
Property value fluctuates, influenced by a variety of factors such as economic changes, environmental changes, depreciation and the basic economic principle of supply and demand. In real estate, a house is worth what a ready, willing and able buyer might pay for the property in the current market. The house’s value can change when the market changes.
Definition of Buyer
Gathering a group of friends and asking them what they would be willing to pay for your house will not help you determine your house’s value. The opinions do not mean a thing unless they are financially able to purchase the house and willing to make the purchase immediately. It is not good enough to claim you would definitely pay a specific amount, if you were in the market. A ready, willing and able buyer is one who acts. To find such a buyer, look for recent buyers of similar properties.
Comparative Market Analysis
Three methods of determining value include the sales comparison approach, the cost approach and the income approach. The sales comparison approach or market data approach is the one used most frequently when estimating a house’s worth. It involves locating similar properties in the neighborhood or nearby neighborhood. The estimator adjusts the actual sold prices to compensate for any differences between the comparable and subject properties. The estimator adds the adjusted sale prices together and divides by the total number of comparables to arrive at the estimated worth of the subject property.
The challenge in accurately estimating a house’s worth is locating suitable comparable properties and making the correct adjustments. Adjustment amounts vary according to region. While there are real estate websites claiming to instantly give you an estimate of your house’s worth, it is a broad estimate and does not take into detailed account the difference between your house and the comparables.
You can hire a licensed appraiser to give you the estimated value of your house. Another option, have a real estate agent prepare a free comparative market analysis (CMA) on the property. Typically, they will only do this for potential listings. While it is not as detailed as the appraisal, it is similar. Another option is the broker’s price opinion (BPO) which is similar to a CMA, yet prepared by a broker for a fee. Regardless of the method used, the final estimate is not a guarantee your house will actually sell for that amount.
- "Modern Real Estate Practice"; Galaty, Allaway and Kyle; 2006
- neighborhood homes image by Wendi Evans from Fotolia.com