What is My House Worth?
In the last 30 days, 351,000 homeowners went to the internet to search for more information about what their home is worth. Often, countless homeowners turn to popular platforms like Zillow or Redfin for an estimated market value. While these online algorithms provide a starting point, today I am going to share with you how professional real estate agents approach value at the local level. I will be sharing my best kept secrets to accuracy and insights on how I determine fair market value for a homeowner wanting to better understand their home’s value.
Most real estate professionals follow the data research approach used by appraisers to establish fair market value. If we take a look at a pool of buyers, according to the National Association of Realtors in 2022, 78% of homebuyers relied on financing to purchase a home. When a buyer seeks financing, the lender usually requires an appraisal to ensure the loan aligns with the home’s actual market value. This safeguards both the lender’s and the buyer’s interests while preventing rapid market inflation. The lender arranges the appraisal through an impartial third party. No involved party in the real estate transaction can request a specific appraiser. An appraiser is randomly assigned and has no stake in the transaction, ensuring fairness for all parties involved. Knowing that a majority of buyers require financing, my goal is to confidently assign a value to a property that can be supported by data when presented to an appraiser.
So, what's the process for appraisers to determine the value of a home? Appraisers follow a systematic approach that involves conducting a detailed property inspection, analyzing comparable sales, and considering additional approaches like the cost and income approach when relevant. In my research, I specifically focus on studying past comparable sales and utilizing their criteria as a guiding factor in my analysis.
When searching for comparables, I focus on 6 essential guidelines that appraisers and professional real estate agents follow:
First, I look for comparable property. For instance, if I'm evaluating a residential, two-story, four-bedroom, 2.5-bathroom home, I aim to identify other homes that closely mirror these specifications. I deliberately exclude condos, manufactured homes, and townhomes from my search to ensure comparability remains consistent.
To start my search, I begin looking for comparable property within a ¼ mile radius of the subject property. Typically, appraisers only require three comparable homes to support a value, but I strive to gather as many as possible to strengthen my findings. If the search within a ¼ mile doesn't procure enough comparable homes, I gradually expand the search in ¼ mile increments, with the goal of staying within a few miles if possible.
Appraisers primarily rely on sold properties as they provide the most definitive and objective data to support value. However, considering that real estate is living and breathing, I also take into consideration active and pending properties to gather real-time insights into current market conditions.
Appraisers typically only consider comparable properties that have sold within the past 180 days. However, during periods of market fluctuations, I may narrow this timeframe to 30-60 days in my own search to ensure a more accurate data set of sold homes.
The direction of the housing market is crucial to consider when evaluating property value. Significant spikes in interest rates, like the one that occurred in the summer of 2022 can completely change the direction of the market. Recently sold comparable data can become irrelevant. Analyzing the direction of the housing marketing during major shifts and providing appropriate pricing recommendations during these times requires a keen understanding and expertise. It takes a trained eye to navigate through market fluctuations and effectively assess the impact on property values.
Finally, it is important to consider market value vs. appraised value. This one can be a bit tricker to analyze. As we know, appraised value is the professional valuation of your home’s worth. Market value is the price buyers are willing to pay. There are many similarities and overlap between market and appraised value. However, local and macroeconomic trends play a large role in buyers’ assessment of property values. Both valuations, which can sometimes be drastically different from each other, play an important role in your home’s worth. For example, appraisers give value to the square footage of your home BUT a buyer's perception of your floor plan and usable space will affect their perceived value of the home. This is where appraised value and market value may clash.
Now that you have acquired this valuable knowledge to enhance your homeowner toolkit, why not put these guiding principles into action? Take a moment to pull up Zillow and challenge yourself to assess your home's value before relying on the Zestimate provided. By practicing this exercise, you will develop a deeper understanding of how to accurately price a home, gaining insight into your property's worth within your specific market.
As you embark on this journey, keep in mind that mastering the art of pricing a home requires practice and a thorough comprehension of your local market dynamics. By following these principles, you will be equipped with the tools to make informed decisions and navigate the process of understanding your home’s value with confidence. Good luck on your journey, and may these insights serve you well as you consider the value of your home!
