The Guide to Understanding Your Home Value
The science behind calculating the value of your home and what it means for your home’s sale price.
Getting ready to sell your house, looking to refinance or buying a new homeowners insurance policy – these are just three of many reasons you’ll find yourself trying to figure out how much your home is worth.
You know how much you paid for the property, and you likely consider the work you’ve done on the house and the memories you’ve made there additions to the amount you’d consider selling for. But while your home may be your castle, your personal feelings toward the property and even how much you paid for it a few years ago play no part in the value of your home today.
In short, a house’s value is based on the amount the property would likely sell for if it went on the market.
Pinpointing a specific and lasting value for a property is an impossible task because the value is based on what a buyer would be willing to pay. Factors come into play beyond the neighborhood, number of bedrooms and whether the kitchen is updated. Other things that could influence value include the time of year you list the home and how many similar houses are on the market.
As a result, a reported value for your home or property is considered an estimate of what a buyer would be willing to pay at that point in time, and that figure changes as months go by, more homes sell and the property ages.
For a better understanding of what your home’s value means, how it may shift over time and what the impact is when the value of a neighborhood, city or even the whole country changes significantly, here’s our breakdown on home values and how you can determine how much your house is worth.
What Is the Value of My Home?
If your property value is based on what a buyer is willing to pay for it, all you have to do is find someone willing to pay as much as you think it’s worth, right?
Determining a home’s value is a bit more complicated, and often it isn’t just up to an individual homebuyer. You also have to keep in mind that buyers place no value on the good times you’ve spent there and might not consider your updated bathroom or in-ground swimming pool to be worth the same amount you paid for the upgrades a couple years ago.
Even so, just because you found a buyer willing to pay $350,000 for your home, it doesn’t mean the value of your house is $350,000. Ultimately, the financial backing in a deal decides the property’s value, and it’s most often a bank or other nonbank mortgage lender making the call.
Property valuation primarily looks at recent sales of comparable properties in the area, and key identifying factors are the same square footage, number of bedrooms and lot size, among other details. The professionals who determine property values for a living compare all the details that make your house similar and different from those recent sales, and then calculate the value from there.
But when your property is unique – maybe it’s a triangle-shaped lot or a four-bedroom home in a neighborhood full of condos – determining the value can be more difficult.
The individual, group or tool appraising the property may also influence the outcome of the appraisal. Different professionals appraise properties differently for a variety of reasons. Here’s a look at common appraisal scenarios.
Lender appraiser. In the case of a property sale, the appraisal most often happens once the property has gone under contract. The lender your buyer has chosen will hire an appraiser to complete a report on the property, getting all the details on the house and its history, as well as the details of similar real estate deals that have closed in the last six months or so.
If the appraiser comes back with a valuation below that $350,000 sale price you’ve already agreed upon, the lender will likely state that he or she is willing to lend an amount equal to the property’s value as determined by the appraisal, but not more. If the appraisal comes in at $340,000, the buyer has the option to come up with the $10,000 difference or try to negotiate the price down.
Many sellers are open to negotiation at this point, knowing that a low appraisal likely means the house won’t sell for a higher price once it’s back on the market.
Appraiser you’ve hired. If you haven’t yet reached the point of putting your house on the market and are struggling to determine what your asking price should be, hiring an appraiser ahead of time can help you get a realistic estimate.
Especially if you’re struggling to agree with your real estate agent on what the most likely sale price will be, bringing in a third party could provide additional context. But in this scenario, be prepared for the agent to be right.
“As much as it’s your home and you’ve made a lot of memories there, once you’ve decided to sell your home, it’s now a business deal, and you should look at it that way,” says Gary Malin, president of Citi Habitats, a real estate brokerage in New York City.
Online home value estimator. If you’re not looking for the additional cost of a formal appraisal, which runs from $300 to $400, according to Angie’s List, many real estate information sites offer more informal home appraisal tools that give you a ballpark value for your home. You may have previously taken a look at Zillow’s Zestimate or realtor.com’s My Home tool, or explored the Federal Housing Finance Agency’s House Price Calculator.
But it’s important to keep in mind that an online home value estimator is simply pulling from available information online and may not have all the facts that a professional appraiser would utilize in a valuation report. The online algorithms also don’t necessarily have the ability to account for more temperamental factors, like the immediate impact a storm may have if it caused a lot of property damage in the area or trends taking place in your city.
“Market conditions can change pretty quickly, so for that you might find a slightly different price if you’re actually going to sell,” says Danielle Hale, chief economist for realtor.com.
Tax assessor. Your home’s value is also determined for the purpose of annual property taxes. In addition to examining the sale prices of similar houses sold recently, the tax assessor also looks at what the cost would be to build a similar house, whether you’ve done any recent improvements, if you earn income from the property in any way and the cost of upkeep.
A property’s assessed value for tax purposes is often less than the appraised value – and that’s a good thing. The property taxes you pay annually are based on the assessed value, so the higher it is, the more you owe the government.
How Do Market Values Apply to My Home?
There are obviously multiple ways to find out the current value of your own house, but individual appraisals and assessments aren’t not the only time you’ll hear about home values. In annual, quarterly or even monthly reports, home values are often discussed along with the rising cost of homeownership on a local, state and even national level.
Depending on the source of information, reported values may be based on the online estimator tools, listing prices for houses currently on the market or property value information from local assessors’ offices. These numbers are useful to discuss overarching trends on a large scale, but they don’t always reflect the actual sale prices of real estate deals that closed in those time periods.
The details you get about rising values can be useful as you prepare to put your home on the market, buy your first house or learn more about economic forecasts, but don’t take national trends as indicators of what’s happening in your area.
Hale stresses that housing markets differ from state to state, city to city and even between neighborhoods: “The closer you get geographically to matching up the area where your home is, the more likely the trend is going to reflect what happened to your home in that time.”
The importance behind trends in home values mean different things depending on the stage of homeownership you’re in or moving toward. Here’s what you should know:
For buyers. As you’re preparing to start the house-hunting process, keeping up on real estate market trends can be an excellent way to know what you’ll be facing. If values are climbing every month and year-over-year comparisons show high growth – for example, 5 percent or more – those are signs that a lot of buyers are looking for houses at the same time as you.
“That gives them an indication of how competitive a market is,” Hale says.
For investors. In many cases, regional trends have changed where buyers are looking for homes. Daren Blomquist, senior vice president of communications at ATTOM data solutions, says many buyers purchasing a home to rent out as an investment for the first time are choosing to look outside of the pricey, coastal cities where they live in favor of smaller, more affordable markets such as Indianapolis or Cleveland.
But before you buy outside the area you live in hopes of making money, Blomquist warns that you should learn more about the market (and whether rental ownership there is fruitful) to ensure the investment is solid. “Part of what’s driving [the trend] is low prices, and that’s a red flag,” he says.
For homeowners and sellers. For homeowners looking to prepare their home for sale or even just know a bit more about their net worth, keep in mind that wider home value trends and reports have little impact on you.
“It’s probably going to be less directly relevant,” Hale says. “If you were to think about how your own individual property changed, a national trend is not a very good comparison.”
Instead, keep a close eye on hyperlocal reports; those that provide monthly or quarterly trends on your specific ZIP code can be a better reflection of what’s happening to your property, Hale says.
How Can I Increase My Home’s Value?
Whether you’re planning to sell now, in a couple years or you’re simply looking to make your home as valuable as possible in the long term, you can potentially help increase its value with regular maintenance, renovations or even additions that could appeal to homebuyers.
Short term. Many homeowners are motivated to add value to a property when they’re preparing to sell. It’s not impossible to add a couple thousand dollars to that price tag with some simple remodeling projects that can make your home look fresh and appeal to buyers. Here are a few:
- Fresh paint in neutral colors
- New landscaping outside
- Smart thermostat to save energy
- New or refinished cabinets
- New or well-maintained roof
- New or well-maintained furnace or air conditioning
Maximizing value isn’t just about cosmetic fixes – it’s also about focusing on key areas like the roof and HVAC that would come up in a home inspection. Issues like leftover water damage on the ceiling from an old roof leak or a cracked window will show up in the home inspector’s report. If anything concerns the buyer too much, you may run the risk of the deal falling through.
“An inspection may unveil some minor issues – or some major issues – and you need to understand that you might need to fix some of these things or you might need to offer these [buyers] a credit to move forward,” Malin says.
Midterm. If you’re looking to make changes to your home so it’s on par with a whole different caliber of properties in your neighborhood, consider these larger construction projects:
- Master suite addition
- Guest bedroom add-on
- Finished basement
- Garage construction
- Complete kitchen renovation
- Bathroom addition
These more extensive changes can be an excellent way to take your home to the next level, but only if other houses like this exist in the area. Adding a master suite and new garage to a neighborhood full of two-bedroom bungalows with street parking won’t make the property appraise much higher than the others. That’s because your house may no longer appeal to the typical buyer in that neighborhood.
Long term. If you’re looking to increase your home’s value for the sake of your overall wealth, however, the best thing you can do is continue to pay off your mortgage and gain equity in the property. With proper upkeep, real estate will, on the whole, naturally increase over time.
That’s why real estate is such a strong investment – but only in the long term. Blomquist stresses that real estate serves as strong tool for building wealth, but attempts to profit too quickly and with little experience in home renovation often don’t succeed. Especially looking at the term of a mortgage, “it’s still a 30-year engagement,” Blomquist says.