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HOW TO DETERMINE HOME VALUE AND WHY IT MATTERS
Use online tools, comparable properties and appraisals to determine value and buy, sell or refinance like a pro.
Beth Buczynski March 11, 2019
Wonder what your house — or a house you might buy — is really worth?
The short answer’s easy: A house is worth whatever someone will pay for it. The long answer depends on the market and whether you’re asking a lender, an agent or a county tax assessor. But why take their word for it?
Knowing how to calculate your home’s value with the help of online tools and trained professionals better prepares you to buy, sell, refinance, tap into your home’s equity or even negotiate lower property taxes.
It can also provide a picture of your overall financial health. Nearly three-quarters (73%) of Americans say knowing the value of their home is important for precisely this reason, according to a NerdWallet survey conducted online by The Harris Poll in August 2018.
Discover five different ways to determine the value of your home below.
How to find the value of a home
1. Use online valuation tools
Searching “how much is my house worth?” online reveals dozens of home value estimators. In fact, 22% of U.S. homeowners who determined their home’s value used an online estimator, according to the survey. The technical term for these tools is automated valuation model, or AVM, and they’re typically offered by lenders or real estate sites like Zillow and Redfin.
Using public records like property transfers, deeds of ownership and tax assessments along with some mathematical modeling, these tools try to predict your home’s value based on recent sales and listing prices in the area.
“Most AVMs on real estate sites are generally for marketing and lead generation purposes,” says David Rasmussen, senior vice president of operations at Veros Real Estate Solutions. “They’re tasked with returning a value for just about every property even when data is limited. And in doing so, they water down the accuracy.”
The AVMs used by lenders and real estate professionals are different. These tools use a “confidence score” to indicate how close the AVM provider thinks an estimate is to market value. A confidence score of 90% means the estimate is within 10% of market value, for example, though each AVM has its own way of calculating confidence.
Professional-grade AVMs with confidence scores linked to accuracy are a step up from the real estate sites, Rasmussen says. But you should always talk to a local real estate expert to get more insight into any online valuation.
2. Get a comparative market analysis
When you’re ready to dive deeper into your home value, you can ask a local real estate agent for a comparative market analysis, or CMA.
Though not as detailed as a professional appraisal, a CMA provides an agent’s evaluation of the home and market to provide an estimate of value, typically for listing purposes.
Local real estate agents may provide a CMA for little or no cost, but be aware: They may do so with hopes of being hired as your selling agent.
3. Use the FHFA House Price Index Calculator
If you’re wary of AVMs but still want a quick estimate of what your home is worth, the Federal Housing Financing Agency’s house price index (HPI) calculator applies a more scientific approach.
The tool uses the “repeat sales method,” says FHFA senior economist Will Doerner. Armed with millions of mortgage transactions gathered since the 1970s, the FHFA tracks a house’s change in value from one sale to the next. Then it uses this information to estimate how values fluctuate in a given market.
“
The HPI calculator is an easy way to see how much your house may have appreciated over time.”
Will Doerner, FHFA Senior Economist
Sounds great, right? Well, keep in mind the HPI calculator looks at conforming home mortgages (loans less than $510,400 and up to $765,600 in high-cost areas) and isn’t adjusted seasonally or for inflation.
Still, “if you have a conventional, conforming loan, the HPI calculator is an easy way to see how much your house may have appreciated over time,” Doerner says.
4. Hire a professional appraiser
Lenders require a home appraisal before they’ll approve a mortgage, but as a property owner, you can hire an appraiser to estimate home value at any time. More than one-fourth (28%) of U.S. homeowners determined their home’s value through an appraisal, according to the survey.
“As an appraiser, my job is to give a value based on the needs of my clients,” says Ryan Lundquist, owner of an appraisal company based in Carmichael, California. “Sometimes clients want the value for a date in the past, and other times it’s a current market value for a refinance or purchase.”
Among other things, appraisers evaluate:
· Market: The region, city and neighborhood in which a home is located.
· Property: Characteristics of the house, including improvements and the land it sits on.
· Comparable properties: Sales, listings, vacancies, cost, depreciation and other factors for similar houses in the same market.
This information is combined to create a final opinion of value for the home and delivered in an official report.
5. Evaluate comparable properties
One thing appraisals and AVMs have in common is their reliance on the recent sale value of comparable properties, often called “comps.” Well over half (56%) of U.S. homeowners estimated their home’s value by looking at comparable properties. On its face, this approach seems simplest.
Pulling comps is one way to determine market value without paying an appraiser, but use good judgment. “Just because the property next door sold doesn’t mean it’s a comp,” Lundquist says.
To choose accurate comps, you must employ an “apples to apples” approach, Lundquist says. Think about which properties would interest a buyer if yours weren't available. Look for similar size, location, condition and upgrades.
To get started:
· Browse a site where MLS listings are displayed, to find the recent sale prices of comparable houses in your neighborhood.
· If there aren’t enough recent sales, look at listing prices, but remember they might not be realistic.
· You’ll need at least three valid comps to come up with a likely range of market value for your house.
Once you’ve chosen comparable properties, things get a little tricky. You’ll need to adjust for differences between your house and the comps, such as adding value to the comp price if it has more bedrooms than your house or subtracting value if its interior is outdated, for example. How much you add or subtract depends on conditions in your market, which can vary widely. After adjusting values, look at your highest and lowest comps. A rough estimate of your home value is somewhere in the middle.
Why home value is important
Knowing your home’s value allows you to evaluate what you can afford, determine whether a listing is priced appropriately and decide how to price your own home, says Gayle Weiswasser, senior vice president of marketing and communications at Homesnap, an app that offers home value estimates.
And the benefits of finding a home’s value don’t end with a purchase or sale: Refinances, home equity lines of credit, insurance premiums and annual property taxes are all based on home value.
Determining your home’s value means greater control over these processes. Property taxes are almost always open to appeal, for example. If you can prove an assessment is too high by pulling comps, you may be rewarded with a lower tax bill.
Additional reporting by Elizabeth Renter.
About the author: Beth Buczynski is a mortgages editor at NerdWallet. Her work has been featured by The Associated Press and Money magazine, among others.