Photo by pnwra
Knowing the true value of a home can be difficult. As we saw with the real estate crisis from the past few years, the housing market can drastically change over the course of just a few years. So what determines a home’s value?
1) Comparable Home Sales
Unless there is some catastrophic change to housing prices – like a massive round of foreclosures that create a huge supply of homes while demand drops – housing prices will move slowly, sale by sale. The reason is because homes are priced for sale based on comparable home sales. Both buyers and sellers have full access to what homes have been selling for (it’s public information). Therefore, if you are selling a 3 bedroom 1 bath home two blocks away from another 3 bedroom 1 bath home that just recently sold for $180k, you wouldn’t price it at $300k. It’s likely going to sell somewhere in the vicinity of $180k.
While there are a ton of different variables that go into a home’s value, recent comparable sales are pretty much the best indicator of what people will be willing to pay.
2) Features of the Home
The whole reason people are able to flip houses and make a nice profit doing it is because the value of a home is not just tied to the number of bedrooms, number of bathrooms, etc. but the condition of the home overall. Sometimes a trashed home can sell for $80k and be flipped for $180k. You can bet that the house flipper did not put in $100k of investment into the property; they may have put just $50k. The condition and features of the home matter when it comes to home value.
Photo by Mirage floors
As someone who recently bought a home that was cosmetically outdated, I saw firsthand how the value of a home is affected (both positively and negatively) by the features of a home. The home we bought has some room for improvement, so it ended up selling for $32k less than the original list price. If the seller had put in $10-$20k of work into the house, they likely could have gotten their original list price. Adding things like an updated kitchen, new fixtures, and staging a home properly can make a home more attractive to buyers and in turn increase the final sale price.
3) Home Appraisal
When a bank gives a loan for a house, they want to make sure the house is worth at least the loan amount. This entails an appraisal that essentially looks at a whole bunch of details of the home, as well as some comparable homes that have recently sold.
Appraisers spend a lot of time putting together their appraisal. Twenty-plus hours is not unheard of, and appraisers have to make sure they have a thorough case for the number they value a home at. If a home is appraised less than the offer price, deals can fall through or at least get a little because it can be appealed by the sellers.
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If you are a homeowner or a potential homeowner, it never hurts to track what homes have been selling for in your neighborhood or the neighborhoods you are looking at purchasing in. The best tool for this is Zillow, which I wrote about in my post How Zillow Fueled My Real Estate Obsession. A warning: Zillow is a huge time suck, even if you don’t plan on buying or selling for years!
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The true value is what someone is willing to pay for it. I think a lot of people forget this point and assume that property always goes up in the long term.
@MonsterPiggyBank Haha I probably should have stated that at the beginning ;) I was more diving into HOW people decide what they are willing to pay for a house.
I remember going through this ourselves when we bought about five years ago. Thankfully there had been a lot of sales in our area before, and our house was a median house for the area, so it was a pretty straight forward process for us.
@FrugalRules It’s funny how sometimes frequent house sales in the area are a good thing…definitely gives you a way to gauge the price. Also crazy how prices vary from neighborhood to neighborhood and city to city.
We recently got our house appraised as part of a mortgage refinance.. Luckily, our home has maintained a fairly steady value, even with the market fluctuations. We did spend 15 grand a few years ago on a new ktichen, which probably helps..
Of course, even with the appraisal value, there is no guarantee that we could sell it for this much.
BTW.. Just saw your footer on the post… We LOVE zillow…
@seedebtrun Zillow is awesome! Very addicting. I won’t be buying/selling for 5+ years but I still spend quite a bit of time on the site.
Oh, home values. We had a good value and were happy with what we could sell our house for, but then my neighbor when out and listed his house well below market value in order to get out. He already built another home and just needed to offload. It really screwed our plans to sell our house.
I love Zillow! When my husband and I moved back in August, I was obsessed with that site. We’re renting right now, but when we do buy, I’m sure it will be one of my favorite tools once again!
I don’t plan on buying a house for another 2-3 years, but I already waste so much time on Zillow, Redfin, and Trulia.
I use zillow for comps and a housing price estimate, but i believe it’s worth much more than they say. Mostly because the info they have is wrong…and though I created a profile and corrected it, the value isn’t where it should be. I also look at the tax appraisal for a good estimate as well.
I check zillow periodically and it seems to be fairly reliable for my region! Good info. Happy new year!
It is a shame when sellers leave money on the table but sometimes they are just in a hurry to get out and can’t be bothered to fix the place up or stage it.
The house next to ours sat on the real estate market last year for quite a few months and the owners had already moved out. Finally they realized that it wasn’t going to sell in the condition it was in so they hired contractors and did a ton of upgrades and then staged it. The new kitchen looks amazing! After a few months more on the mls it finally sold. And this was a $477K house.
There truly are a lot of factors that determine your home’s value. Comparable home sales are one of the big ones, and we’ve watched in horror at a recent glut of foreclosures in our area. It is what it is though. Luckily there have been a few recent positive sales in our area, so I think that should help.
Zillow can be helpful in giving you a ballpark idea of what your home is worth, although we’ve found their data to be so-so in our area. It is fun to check out their site though to see all the recent sales of comparable homes, how much people paid in taxes, etc.
We’ve also had mixed results from having our home appraised. I think it all depends on the appraiser, and what it’s being done for. I’ve found that the appraisals for a refinance for example are much more cursory – at least in our experience.
I have been wasting SO much time on Zillow, Trulia and Redfin. We are looking to buy a house this year and these sites are addicting.
I’m sure the foreclosure next to us is really sinking our perceived homes value. :(