Perhaps the most common question heard in the real estate business is: What is my home worth? Whether one is needing to sell, considering options, or just interested in how much the home’s value has appreciated, this question seems to cross every homeowners’ minds at some point in time.
There are various ways of coming up with what is an estimate at best, regardless of the sophistication of the method or practitioner. Until the house is marketed and sold, no one knows with certainty what the sale price will be. Homes frequently sell for above or below the appraised value, which is generally regarded as the gold standard of valuation and requires the greatest experience and expertise to perform. So, any exact number should be taken with a grain of salt.
A home’s value can be defined as the price agreed upon by a willing buyer and a willing seller in an arm’s length transaction, with no duress on either side. Arm’s length means there is no preexisting relationship between the parties, either personal or business. Duress means that neither party is forced to act quickly, for whatever reason.
So, what IS the best way to get a handle on the value of your home short of selling it? Let’s review the common methods then compare how they come up with their results.
Appraisals are performed, unsurprisingly, by appraisers. Becoming an appraiser requires a course of study, a qualifying exam, licensure in the state, and a lengthy apprenticeship. Appraisers live and breathe real estate values and are irreplaceable if you need a professional estimation of value.
The appraisal process involves a visit to the property along with an extensive investigation of similar properties that have sold in recent past. Optimally, all properties used to compare with the subject property have no special conditions of sale, such as a short sale or foreclosure. It is helpful if several similar properties can be found, some superior to the subject property and some inferior. Based on their knowledge and experience an appraiser will make adjustments to the value they are placing on the subject property to reflect these differences. For example, a subject property has three bedrooms whereas the comparable has four. The appraiser will adjust the subject property’s estimated value downward (compared with the sale price of the comparable) to reflect the value added by the presence of a fourth bedroom.
Appraisers will also attempt to determine that a transaction was clean: arm’s length, no special concessions, and nothing extraordinary that might impact the sale price. Once all of this has been accomplished, a report is generated showing the subject property and each comparable sale, with a side-by-side comparison of features and adjustments made. At the end, a value is provided, based strictly on the appraiser’s experience and evaluation of the data. It is not based on average sold prices, prices per square foot, or any other method of calculation.
Broker price opinions (BPOs), on the other hand are performed by real estate agents. Although sharing many similarities with the appraisal process, such as the search for comparable sales, these reports tend to be much less rigorous. One exception is a BPO performed by an agent representing a bank on a foreclosed property. These reports require the same data, paperwork, and time as an appraisal.
Most often, BPOs are prepared as part of a listing presentation. These reports can range from a superficial review of comparable sales to a professionally prepared package with pictures and descriptions of the “comps”. In each case the agent then provides his opinion of what the home might sell for given the current market conditions and the seller’s timeframe.
When comparing properties, agents are more likely to “talk” in terms of price per square foot, although they try to keep to the same guidelines followed by appraisers in choosing comps with respect to year built, square footage, number of rooms, proximity to the subject, and how long ago the comp sold.
Finally, Automated Valuation Models (AVMs) rely on publicly available information fed to a proprietary computerized algorithm that generates home value. Probably the best known to the general public is the Zillow Zestimate. AVMs are also used by other entities such as banks and mortgage brokers.
All AVMs suffer from the same deficiencies, which stem from the absence of any human interpretation of the data. For instance, a given AVM might have a one-mile radius from which it draws comparable sales. Never mind if the one-mile radius crosses a freeway to a totally different neighborhood. An AVM can’t “see” the house, the yard, the upgrades or lack thereof nor can it apply any judgment. It is strictly a numbers game.
AVMs work best in “cookie-cutter” neighborhoods with lots of sales. Older neighborhoods where homes have been upgraded, upgraded but not well-maintained or in poor condition are notoriously difficult for AVMs to price realistically. In addition, values in custom home neighborhoods where the houses are each one of a kind are much more difficult to assess by an AVM.
The other problem with AVMs is their reliance on public data. Depending on how timely this data is uploaded to available sources, the valuation produced by the AVM will trail the market to a greater or lesser extent.
So why would anyone use an AVM or BPO? Cost primarily. Appraisals cost hundreds of dollars. AVMs are free, but some would argue you get what you pay for. AVM’s are fun to check, provided you keep their limitations in mind. BPOs are generally free to homeowners, particularly when prepared in the process of helping them arrive at a price for a home to be listed for sale.
Have I piqued your curiosity to wonder what your home might be worth? We would be happy to provide you an estimate without obligation.
Courtesy of Linda Humphrey