How to Determine the Value of a Home

A home may be given numerous valuations depending on 1) the purpose of the valuation and 2) the methods and techniques used by the appraiser. Home values may be determined for purposes of refinancing, or obtaining 2nd mortgages or in the pricing of a home for sale. When deciding how to value a home for sale or purchase, several forms of valuation come into play in addition to other factors such as market conditions, location, proximity to schools, utilities etc.

In terms of different forms of valuation there are tax assessments, banking appraisals, fair market appraisals, insurance appraisals, market valuations and of course individual estimation of value. This article will discuss the different forms of valuation and other conditions that can influence the price of a home outside of appraised valuation.

Types of property valuation

Tax Assessment: Tax assessed value is typically lower than market value but varies from locale to locale. Tax assessed value may be as low as 30% below market value and thus is not always ideally considered as the selling price of a home. The tax assessed value is determined by local Government and can be a useful metric in determining the minimum value of a property.

Fair Market Appraisal: A fair market appraisal may include one or more independent property valuation estimates from bank appraisers or bank affiliated appraisers and/or independent appraisers. According to Mortgage News Daily, market appraisal may also include a "Broker's price opinion" or a "Comparative market analysis" which are estimates arrived at through the judgment and expertise of real estate agents and brokers. 

Insurance Appraisal: Insurance appraisals are performed by insurance companies in determining the cost of replacing a home in the event of a catastrophic event such as a tornado. Insurance appraisals are typically closer to market value and may take into account inflationary pressures on the cost of replacing property.

Individual Appraisal: When a person or family lives in a home, repairs it, pays taxes on it, pays the mortgage, may be familiar with similar home prices in the neighborhood etc. Consequently, they may develop an intuitive sense of a home's value simply through involvement with the home. This can lead to an individual assessment of value which may or may not conform with appraisers estimates of home value. To ensure the accuracy of such an individual appraisal, taking into account variables might be of assistance. A few such factors are the following:

• Percentage annual inflation
• Operating costs
• Investments into the home
• Annual appreciation of the home's value
• Taxes paid on the home

Influences on home prices

Despite all the above forms of estimate, a market may not value a home the same way. This is due to other factors external to the intrinsic physical value of a home and the independent judgment of various appraisals. While in theory property appraisals should take into account a broad range of price influences, those influences can change quite frequently causing the market price of a home i.e. the selling price to fluctuate with changing conditions such as the following:

• Macro Economic conditions
• Market forces such as volume of buyers, demographic trends etc.
• Interest rates
• Neighborhood conditions
• Local Supply and Demand

Valuation resources and tools

When determine the value of a home there are several useful methods available to help arrive at a reasonable value. While no single mechanism of home valuation is a de facto determinant of value they can be helpful in recouping investment costs, inflation, maintenance and in some cases capital gain. A few of the pricing mechanisms are provided below:

1. Essential financial formulas

Since not all homes yield an income through rental, the inclusion of costs into the selling price of home is simply a matter of adding up all renovation, repair, maintenance costs etc and included those costs into the selling price. Maintenance costs that are tax deductible may then be removed from the selling price due to the affect of tax benefits on cost.

In the case of homes that incur rental income, different financial formulas can be used to assess yield, return before expenses and operating costs as a percentage of income. A few of these formulas can be obtained by linking to the references in this article. If a home owner has a set yield and/or capital gain on the sale of the home in mind, these formulas can assist in determining how close to that financial goal the property valuation is.

2. Real estate websites

Real estate websites sometimes have toolbars and links that can help a home owner assess the value of a home in addition to market conditions. One such website is www.realtor.com and another useful website is the U.S. Census Bureau, census of housing which provides longer term pricing information. Websites such as these and others can help home buyers and sellers determine sale prices of nearby properties that are similar, and influential conditions such as interest rates.

3. Qualified appraisals

As mentioned above several types of home appraisal exist. One way to deal with any ranges of such appraisals could be to average them out to come up with an average appraised value if several appraisals are gathered. This average can then be compared to the costs of the home to see if the price incorporates those costs and any potential capital gain. If not, the property may be sold at a loss or the price may be reconsidered. Real estate appraisers can be obtained from several sources including 1) Realtor or agent recommendation 2) mortgage broker recommendation 3) appraiser directories and 4) word of mouth.

Finding the value of one's house can be as simple as coming up with a price that seems right and making that the selling price or it can be more exacting. In the latter sense, the property owner may take into account a number of factors including costs, taxes, appraised valuation and market conditions before coming up with a value and/or price dependent on whether or not a real estate transaction is involved. Home valuation may also be used in determining 2nd mortgages, and/or home equity lines of credit in which case a bank determined appraisal. Home valuation is somewhat subjective and ideally should consider as many financial factors as possible to ensure accuracy. However, despite this, home valuation estimates can and still do vary making the process a somewhat unscientific valuation.

Sources:

1. http://www.mortgagenewsdaily.com/3162005_Home_Appraisal.asp
2. http://en.wikipedia.org/wiki/Real_estate_appraisal
3. http://appraiserusa.com/
4. http://www.realtor.com
5. http://www.helium.com/tm/895496/calculating-return-estate-investments
6. http://www.census.gov/hhes/www/housing/census/historic/values.html

How to Determine the Value of Your Home

To determine the value of your home involves understanding what it is realistically worth, and what price the home will be more likely to sell at. This can be done using a number of methods including property appraisals, median area income, your home's historical cost basis and local property tax numbers to attain a realistic price range and base target number.

Pricing your home yourself involves combining numerically calculations and home specific evaluation. This determines a real estate value that is adjusted for factors such as home size, street sales, market conditions and home improvements for a more balanced home valuation. The following steps illustrate the different ways your home's value can be determined.

• Quantitative assessment

1. Determine home value as percent of tax

Each state charges different average percentages of property tax. Using the National Association of Realtors (NAR) Metro Median Price Map the median property tax paid can be used to calculate the median home price. For example, if the median tax paid is $1,733 and the tax rate is .66 percent then  $1,733/66= (26.2575 x 10,000) = $262,757.75. Alternatively, $1,733/.0066 = $262,757.75. This is the price of homes in your area based on median property tax paid.
2. Use median income to calculate home price

According to Fannie Mae, a national mortgage buyer, the 2010 average median income in Fairfax County, Virginia is $103,000. Using the CNN home affordability calculator, accurately enter in the average median income and additional data with $0 monthly debt. The result will yield a low and high minimum house price, in this case a low of $458,558.90 with .66 percent tax, 3 percent down-payment, $0 debt, and $103,000 income.

3. Identify inflation adjusted home value

Inflation adjusted home value can be estimated using The Federal Housing Finance Agency House Price Index (HPI) calculator if the home is being sold. This will give an value of the home based on area house price market movements using the original purchase price and date of the home. The results for this method are reasonably good and will give step four a stronger base value with which to work. For example, a home bought for $200,000 in the same area as step two in 2002 would be worth $295,904 using the HPI calculator.

4. Create house price range

Using the home prices in steps one and two, a range of average home value can be determined. The third value or HPI number gives you a cost based estimate that could exceed the high value of the price range. This price range gives you an idea of what prices you could realistically sell your house for and if your home is priced above average market costs. For the example in this article the house price range is $262,757-$458,558 and the cost based adjusted estimate is $295,904.

• Qualitative evaluation

The above method does not take into account differences in home models such as home improvements, maintenance, neighborhood conditions, local demographic trends etc. For this reason a qualitative appraisal is also helpful, if not essential, in determining the value of your home. For example, two 2 bedroom apartments on the same street could sell for a difference of thousands of dollars because home A included a hot tub.

When making a qualitative assessment add or subtract value from the value in step 3 above  and compare that price to the cost of homes sold on your street. For example, using Zillow.com, you can get an idea of what similar homes are selling for in your area. Realtors and Real Estate Agents may also be able to provide you with recent home sale statistics for your neighborhood.

After performing a quantitative and qualitative assessment of the value of your home, you may compare your results with those of professional appraisers if you choose to do so. In such case, depending on who is doing the appraising, the values may differ a lot based on the purpose of the appraisal. For example, an insurance appraisal or tax appraisal may be lower than a market appraisal.

Sources:

1. http://bit.ly/cwQwjq (Federal Housing Agency)
2. http://bit.ly/gbUd (CNN Money)
3. http://bit.ly/RsmqB (National Association of Realtors)
4. http://bit.ly/cz0Bhq (NAR Tax map)
5. http://bit.ly/bnPnoe (Fannie Mae)