There are three values that a home can have: The seller’s value, the buyer’s value and the professional appraiser’s value. It is important to align these three numbers in order to make a purchase successful.
You don’t want to assume that the asking prices for a home are equal to its fair market value. Home values can be subjective and change over time. Understanding how they are calculated and the factors that impact them can help you make sound real estate investments.
Buyers need to do their research and take the time to find out the market value of a property before making an offer. You risk overpaying.
What is market value?
Simply put, market value refers to the price a willing buyer would pay to purchase a home. It is based on the prices of similar homes in nearby areas — also known as “comps” or comparable homes.
What are comps in real-estate?
Comps are comparable properties that have been recently sold. They are used by appraisers and agents to determine the home’s value. Comps can be used for multiple purposes:
- to determine a listing price for a home that is about to go on the market
- to assist buyers in determining a fair price
- to help an existing homeowner determine the current value and potential equity
Comps typically consider five key criteria when calculating the value of a home:
Timeline: In a typical market, comps include homes sold in the past three to six months.
Location: Comps should be pulled from the same neighborhood, and in close proximity to the home in question. Comps are typically located within a mile of a home in an urban area. Rural areas will have a greater radius from which comps are pulled.
Home size: Comps should have the same number of bedrooms and bathrooms, same number of stories and a similar square footage. A lot size and the presence of a basement or garage should also be comparable.
Features: Comparable homes should have similar amenities and level of finishes and updates.
Age: The homes being compared should be roughly the same age. Newer homes are more modern in design, layouts, systems, and appliances. This can increase their value.
How to determine your home value
Comparative data is used to determine the value of a home. Three to five comps are gathered and grouped together. A report is then generated that determines a market price based on details and sales prices of these homes. There are two types of reports depending on who is doing calculations:
- Comparative Market Analysis (CMA): This is a report typically generated by a real estate agent, used to come up with an accurate list price/estimate of a home’s sale price.
- Appraisal: This is a report generated by a licensed appraiser and it’s typically used for financing approval.
Keep in mind that the market price you receive from an appraiser or agent can vary depending on a number of factors.
Market speed: If your local real estate market is moving slowly, you might have to depend on comps that are older or less relevant, which could affect the results.
Comp selection: When multiple relevant comps are available, different agents or appraisers might choose to use different comps, which can affect the outcome slightly.
Valuation of features: The agent or appraiser will add or subtract value based on the features of a specific home, and different agents or appraisers may assign slightly different values to home features.
Subjective human nature: CMAs and appraisal reports depend on humans to evaluate and calculate the home’s value, which means you won’t get the same outcome every time. Remember that the true value is what a buyer will pay for it.
What’s valuable to one buyer isn’t valuable to another
It all comes down to individual buyer preference. If a swimming pool is included in the home’s price, but you don’t plan to fill it up and re-landscape it, it doesn’t make sense to spend more. It may be worth spending a little more to get a house with high-end, wall to-wall carpet if you love new carpeting. It’s not worth it if you plan to remove it to install hardwoods. If you’re a minimalist cook who prefers to use the microwave, you won’t want to spend a lot on a gourmet kitchen. A smaller, more functional one would be fine.
Does the Zestimate determine fair market value?
Buyers may use the Zestimate to determine the value of a house listed on Zillow. Zillow’s estimated home price should be used as a guide, but it should not be the only data used to determine a home’s worth. The Zestimate uses a proprietary algorithm that calculates both public data and user-submitted data in order to estimate a home’s value.
The Zestimate does not replace an appraisal, CMA, or other home value estimator.
Key factors that influence home value
Home values tend to be based on comps but it’s important that you consider the key factors of a home when choosing comps to use. If a comparable home in a better location sold recently, it is likely that it is worth more. How much more? It’s up the buyer to decide.
Location
Many aspects of a home can easily be modified by the owner, including finishes and home size. However, you cannot change the location of your home. It is why the location is so important in determining a home’s worth. A home’s land value will not increase beyond what the market is willing to pay. It will only rise in value if there is improvement in the surrounding area. For example, 64% of buyers say being in a walkable neighborhood is very or extremely important, according to the Zillow Group Consumer Housing Trends Report 2021.
Here’s a list of key location factors that can help increase a home’s value:
- Proximity for urban core
- Culde-sac or dead end (less traffic )
- Farther away from railroad tracks and airports
- Near parks and green spaces
- Sidewalks and walkability
- Proximity for public transit
- Waterfront, water or mountain views
Job market
When the job market is strong, and incomes are rising, people might look to purchase a home or move into a larger or better home. This increases the demand for homes, and boosts competition among buyers.
Property taxes
Budgeting buyers consider their monthly housing payments, including taxes. Homes with high property taxes may be too expensive for some buyers. Property taxes are necessary to pay for local services. You, the buyer, will need to decide between local benefits and savings.
Interest rates
Buyer demands tend to be higher when long term interest rates are lower. Low interest rates give buyers greater purchasing power. However, buyers who have high interest rates may find it harder to pay off other debts, which could impact their ability buy a home. Housing prices tend to fall when there is less demand.
Home maintenance
While not directly related to the home’s worth, buyers might want to consider any maintenance costs they will have to pay, especially during their first year of ownership. Will they need to replace the water heater? When budgeting for a home, be aware of these hidden costs.
The consequences of valuing a home incorrectly
Overpaying for a home is the biggest risk to buyers. Other consequences include losing financing after an appraisal or not having your offer accepted.
Overpaying
If you value your home too high, you could end up with a loss on your investment, especially in volatile market conditions. You will also have to repay more money the more you borrow.
Low appraisal
Even if you and your seller agree on a price for the property, the appraiser’s appraisal will determine how much your lender will loan. It can be difficult to get financing if you agree to pay too high. If the appraisal is too low, you may need to pay a higher down payment or risk the deal falling apart.
Missing the opportunity
There is also a risk when you value a home too low. You may have to sell your home if the seller rejects your low offer.
What’s worth more: the home or the land?
Generally speaking, a home that is older and more well-maintained will be worth more than the land. But in 50 years, without upkeep, the land would probably be worth more. If everything is original, the home’s physical structure, appliances, and materials will depreciate over time.
Most homeowners continue to maintain and improve their homes over time. The longer you stay, you will need to make improvements to preserve the home’s value. The cost of labor and materials increases steadily over time so improvements are moderately predictable.
Land’s value is more volatile and difficult for people to predict. A home located close to popular shops, restaurants, cities centers, or attractions will generally have higher values than a home further from these amenities. However, these amenities and their desireability can change over time.
If you are buying a home with a view, or near a city center, chances are that it will appreciate in value. However, land value is not guaranteed.