If you’ve ever seen an ad that says “find the value of your home” or “click here to see what your (city) home is worth” or if you’ve ever wondered how accurate your Zestimate is (hint: not very), I want to explain why any automated home valuation tool is so very wrong, and why using one to price your house could cost you tens of thousands of dollars.
First, let’s start with the definition of home value. A home’s value is simply “what somebody is willing and able to pay for it”. To find the TRUE market value of a house, the best way to do that is to put it on the open market and find out what Buyers are willing and able to pay for it. Once a sale closes, and funds are transferred from Buyer to Seller, then we know the actual value of that particular house. Up until that point, everything else is an educated guess.
Prior to a sale, it must be emphasized that coming up with a home’s value is way more art than science. There is no set formula, and a lot of the variables require interpretation by whomever is trying to determine the value. Realtors, Lenders, Appraisers, and your nosy neighbor all use the same general frame work to determine a home’s value, but because the criteria is so subjective, 10 different people can come up with 10 different values for the same home.
That frame work is taking what similar houses in a similar location have sold for in the recent past, and comparing them to our subject home. These sold houses are called “comparable sales” or “comps”. The last factor is “the market”, meaning how favorable conditions are for Buyers to buy and Sellers to sell, and if conditions skew favorability towards one side or the other.
As you can see, the variables in a home’s value are incredibly vague. Who determines what houses are “similar”, and what location is “similar”, and how “recent” do sales need to be to count? (Hint: Some of it comes down to who makes the best arguments, and getting Buyers, Appraisers, and Lenders to agree to your number is what makes the best Realtors)
There are just too many nuances about the home valuation process that automated home valuations cannot take into account.
This is where you want a professional, human opinion. Somebody that’s in the market helping people buy and sell houses everyday will know infinitely more about how the details of your particular house affect its value than an automated system can.
Let’s look at some of the details about your house, and how they can influence its eventual sale price.
Location, Location, Location
Let’s start with location. We’ve all heard the phrase “location, location, location.” This element of home value is fairly intuitive. We all know that a house that overlooks the ocean is more valuable than an identical house a few blocks inland. Most Appraisers will look for comps in a half mile radius, but will expand that if there’s not enough sold homes to come up with a value. Experience is big here. Even within a certain neighborhood, crossing certain streets makes a big difference in what Buyers will be willing to pay. And then, the immediate surroundings of your house can increase or decrease value. Being on a busy street versus a quiet cul-de-sac, backing to open space versus having train tracks or an industrial area behind the house, being under power lines, being near parks or walking trails, or any other unique characteristic specific to the location of the house is going to affect its value.
Comparing the sale prices of homes with similar location characteristics to other houses in the neighborhood can give us an idea of how much those characteristics increase or decrease the value of the home relative to the rest of the picture.
House Characteristics
Once you’ve defined a location that you think is similar to the subject house, we want to find houses that have sold recently that are similar in other ways. I always start by trying to find houses with similar total and finished square footage. What I’m trying to do is find the price per square foot, and make adjustments from there based on the rest of the characteristics of the house. In a given location, smaller houses are worth more per square foot, and bigger houses are worth less per square foot.
For example, a 1500 square foot house might sell for $200/sqft, and right next door a 2000 square foot house might sell for $185/sqft, and next door on the other side a 2500 square foot house might sell for $160/sqft.
Then I look at the rest of the house stats, and try to find the most similar comps. I look at the year the house was built, the number of bedrooms, bathrooms, and parking spaces or garage spaces, and I also look at the size of the lot. In general, more bedrooms, bathrooms, garage spaces, and bigger lots are more valuable.
Condition and Amenities
Once I have enough comps that I think are similar to the one I’m evaluating, then I compare the condition and amenities. Again, this is somewhat intuitive. Houses in nicer shape with better amenities are worth more. Buyers will pay more if a house has new carpet, new paint, upgraded kitchens and bathrooms. They’ll also look at the age of the roof, heating and cooling systems, windows, plumbing, and electrical. Although sometimes that information isn’t readily available when looking at comparable sales.
Lastly, we look to see if either the subject house or any of the comps have unique amenities that would affect what a Buyer would be willing to pay. This is highly subjective, and a lot of amenities can be seen as either pros or cons by different people looking at the house. Things like hot tubs, elevators, mechanical window coverings, fancy electronics or smart features can be seen either as desirable improvements that one Buyer would pay extra for, or as expensive maintenance headaches that detract another Buyer. For that reason, most Appraisers hesitate to add or reduce value for these kinds of items.
Sale Date
How recent a comparable house sold is also important. In a balanced market, we try to look at comps from no later than six months back. If values are holding steady, six months is enough time to get enough data to determine value. In a market where values are rising or declining, however, the more recent the sale the better. A house that sold yesterday is more indicative of today’s values than a house that sold a year ago. There is some benefit to looking at older sales. Looking at sold comps from further back can give you an idea of pricing trends and help you determine which way the market is moving.
“The Market”
When people ask “how’s the market” or “what’s the market doing”, what they’re really asking is “are conditions more favorable to buyers or sellers?” There are a LOT of different factors that go into this very subjective factor of housing values. To over-generalize and over-simplify, the biggest factors that determine the real estate market are supply and demand. If there are more houses for sale than there are buyers shopping, then supply is high and demand is low, which means prices will be moving downward. If there are more buyers than there are homes for sale, supply is low and demand is high, meaning prices will be moving upwards. The way to measure this is in “months supply”, which is a measure of how quickly all of the homes for sale in a market would be placed under contract if no new listings were added. A perfectly balanced market has 6 months supply. A Buyer’s market has more than 6 months supply, and a Seller’s market has less than 6 months supply. Again, this is a WAY over-simplified version of what determines the market, but for valuing a house, knowing the ratio of supply to demand is essential.
Experience
The last factor that goes into accurately estimating the value of a home prior to selling it is the experience of the person doing the evaluation. Being actively involved in the real estate market day to day is vital to knowing how Buyers are acting in the market, pricing trends, style and design trends, and details about the location. The experience and knowledge of how to reconcile all of the above information will determine how accurate your home value evaluation is.
Actual Value
Ultimately, the actual value will come down to what a Buyer is willing and able to pay for the house when it’s listed for sale. And since all of the factors determining “value” are subjective, the price a Buyer pays is negotiable and arguable. So the final number is generally determined by how well the person selling the house is able to convince a Buyer of his or her interpretations of all the factors. And since so many home sales are financed, getting the Appraiser to agree on that number takes a lot of skill and finesse as well. It’s difficult, but it’s doable. I’ve had quite a bit of success changing Appraiser’s minds after an initial low appraisal, and getting them to agree with my higher opinion of the value of a house I’m selling.
To find out what your home is worth, fill in your address below, and I will send you a no-cost evaluation of your home’s value.
I genuinely hope this article has helped you understand home values, and if you ever have any questions or would like to discuss selling your home, please feel free to reach out below!
