What is the “real” value of a home?

Aug 20, 2015


This question comes up in every real estate transaction. Sellers want to know at what price to list and buyers want to know the right price to offer.  We see many variables that must be considered in order to guide clients to make these determinations.

Sellers and buyers frequently ask their Realtor® to answer the question of home value.  These days, the perception of value can come from many sources including Internet websites, county assessors, rumors of the amount another home in the neighborhood sold, appraisers, or even their neighbors and friends.

Many websites will generate automatic values for homes. Some of these sites have become the go-to resource; however, they can produce values that do not reflect the actual market. Disclaimers on some websites show large standard deviations to protect themselves from being sued. On the other hand, some homeowners believe that their home’s value is what the county assessor tells them the value is. However, the county assessor typically looks at past sales amounts dating back two years forsimilar homes. County assessors do not look at recent sales. Please know that I am not necessarily knocking these methods of valuation. Instead, I would like to point out that there are lots of ways to value a home.

There is an old cartoon that laughingly points out the various ways people think of value. This cartoon has a mansion with a caption below that says, “How the tax man sees your home.” Then, there is a drawing of a shack and below it the caption reads, “How a prospective buyer sees your home.” Next is a drawing of a modest looking home with a caption that says, “How an appraiser looks at your home.” You can imagine an appraiser created that cartoon. We all have the tendency to think that we have the best way to valuing a home.

I think of this cartoon because, frankly, in most real estate transactions, that is how your home’s value will be determined. A bank or mortgage company will likely loan a buyer the funds to purchase the home. The lender will hire an appraiser who will prepare an appraisal using “standard appraisal guidelines” to determine that value. Standard appraisal guidelines tell an appraiser to find similar nearby homes that have sold recently and make appropriate adjustments to come up with a value for a home.

Realtors® produce comparative market analyses (CMAs) to predict the value. We like to find homes that are in your neighborhood, built around the same time (+/- a few years), similar square footage (+/- 20% of above grade square footage), situated on a similar lot size (+/- 20%), and a similar type of home (comparing ranch style homes to other ranch style homes), etc.

Please keep in mind that the goal is to determine “fair market value”. Fair market value is the real value and it may be defined as what a willing buyer will pay a willing seller in an arms length transaction.

You should also consider the market conditions. For example, what are the average days on the market, is inventory high or low, and is demand high or low? A “seller’s market” is generally characterized by a low number of days on the market, low inventory and high demand.  A “buyer’s market” is generally characterized as longer days on the market, higher inventory, and lower demand. Markets can shift very quickly given economic realities and what is playing out on the world stage, such as wars or attacks on our soil. Public perception can dictate the type of market we experience. When the public is feeling optimistic, we see the stock market climb, home prices climb, and unemployment typically goes down. In other words, we tend to spend money when we feel secure, and sit on cash when we feel uncertain about the future. When we spend money because we are feeling secure, generally speaking, this drives up prices. All of these factors affect the price of homes. Here is the tricky part, we oftentimes cannot predict the type of market that is coming and this drives the question of “when should I sell” or “when should I buy”. Of course, the answer is always, “buy lower and sell high.” How do you know when those times occur? It is important to work with a competent Realtor® to help guide you through the process and help you make these determinations.

Right now, home prices continue to rise and demand remains strong. I have seen some economic reports that suggest we may be reaching some stasis. What does this mean? Personally, I doubt we will reach any true stasis for a while longer. Until we see supply catch up with demand, we can expect to see home prices rise.

If you would like us to prepare a comparative market analysis (CMA) of your home or to discuss the current real estate market, one of our brokers would be delighted to do so. Please call or email us today and we will be happy to meet with you.

Jon-Bio-2014-border– by Jon Terry, CMAS®, J.D.

Current Past Chair of the Mountain Metro Association of Realtors®

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