Do you know what your home is really worth? The main sources of economic information on households rely on home owners’ estimates of their houses’ values. However, home owners rarely estimate the values of their homes correctly. In fact, the average US homeowner overestimates the value of his/her house by 6%. With online estimates from sites like Zillow and Redfin leaving much room for error, those numbers must be taken with a grain of salt. There are so many factors in a home that online estimates are unable to consider. More of an art than a science, home valuations are best left to realtors.
Basic valuation concepts
A property’s value is technically defined as the present worth of future benefits arising from its ownership. Unlike goods that are quickly used, the benefits of real property are realized over a long period of time. Therefore, an estimate of a property’s value must take into consideration things like economic and social trends, governmental regulations and environmental conditions. Elements of value include demand, utility, scarcity and transferability.
- Demand: the desire or need for ownership supported by the financial means to satisfy it
- Utility: the ability to satisfy future owners’ desires and needs
- Scarcity: the finite supply of competing properties
- Transferability: the ease with which ownership rights are transferred
One thing to note is that value is not equal to cost or price. Cost refers to actual expenditures (materials or labor, for example). Price, on the other hand, is the amount that someone pays for something. While cost and price can affect value, they do not determine value. The sales price of a house might be $900,000, but the value is likely higher or lower. Factors like an unknown defect of the house, such as a faulty foundation, would make the value significantly lower than the price.
Next, let’s consider market value – the most probably price that the home will bring in the market. Market value is determined by an appraisal, or estimate regarding a property’s value as of a specific date. Appraisal reports are used by individuals, investors, businesses, government agencies and mortgage companies when making decisions regarding real estate purchases. Market price (at which property actually sells) may not always represent the market value. We know that there are many human factors that could cause the property to sell above or below its market value.
Reasons online valuation could be off
- The MLS data is incorrect. If there’s a discrepancy, it’s usually because the facts themselves are not up to date.
- Few homes in the neighborhood have sold in the last six months. The more homes that sell, the more MLS data and the more sale prices the computers have to calculate value. With few sales, there is less information to draw from.
- The home has not been on the market in recent decades. There is significantly more information about a home in an MLS listing than there is in the tax records. Once a home has been listed, the services add that data. As homes are sold, the models can adjust for whether the home sold for more or less than asking price or the AVM price.
- The home is not like others in the neighborhood. Whether a real estate agent, an appraiser or a computer is evaluating your home, it’s harder to arrive at an accurate value if there are no comparable homes. Homes that have unique features, like the Playboy Mansion for example, are harder to value because it’s so one of a kind.
- Public records in your jurisdiction omit key information. The approximately 3,100 counties in the US don’t all record the same information about homes. Some counties, for example, don’t include the home’s square footage. “There is a wide variance in the quality of the data we obtain.
- The market is changing rapidly. Home valuations are based on past sales. If the market is significantly hotter or colder than it was six months ago, those past sales are less an indicator of current values.
The psychology behind realtor and seller valuation
There are several goals which reputable realtors try to meet with a listing price. First and foremost, they want the home to sell quickly. A property that languishes on the market tends to lose value. Realtors don’t want to overprice the property, driving away potential buyers and causing the property to stagnate. They don’t want to underprice the property either, as that would hurt the seller’s interests. Sometimes owners want a higher value because they see the list price as a reflection of their importance. As a result, setting a sales price involves an understanding of more than bricks and mortar. Homes reflect who we are and are tied to our ego, status, pride, image and other subjective qualities. For such reasons, the seller may want a certain price for the property. Perhaps a neighbor or competitor got that price and the seller is stuck on matching it.
Why valuing homes is a realtor’s job
Why is it that home valuations are best left to realtors? How does a real estate agent create a sales price? There’s more experience and finesse involved in the process than most buyers and sellers realize. A good place to start is to consider that there is no single list price. Different realtors with different perspectives will suggest different values. Realtors will look at the current housing market and use Comparative Market Analysis, or CMA, to assess the home’s valuation. The CMA outlines the proposed sale price, the reason for it, and include a marketing plan explaining how the realtor expects to sell the property. Realtors are also hyperlocal experts, with the intel about the neighborhood statistics needed to properly price the home.
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