What's It Worth? Determining Home Value

Bigger isn’t always better, and granite isn’t always great — a wide range of factors go into determining home value

What is fair market value? Fair market value is the price a home will sell for, if put on the market for a reasonable amount of time. Buyers, sellers, and financers must all agree that the home is worth this selling price. The fair market value is also used by the tax assessor to calculate property taxes and by insurance agencies to set premiums. Unfortunately, determining what a home is worth is not a simple calculation, but there are factors you can use to arrive at an educated guess. For a more highly educated estimate than your own, talk to a real estate agent. An appraised value, of course, must come from a professional property appraiser.

Here’s a quick rundown on several crucial factors that play into determining home value:

LOCATION: Again and again, real estate experts cite location as the foremost factor in a property’s value. After all, a mansion overlooking a dump wouldn’t be worth nearly as much as one perched lakeside. U.S. News & World Report notes that many important factors fall under the umbrella of location, such as nearby real estate transactions, or comparable sales, and school districts. The answers to a long list of questions related to location influence value. What’s the traffic like in the neighborhood? How are the house and nearby properties zoned? What commercial properties, such as stores, are close? Is new development planned for the area? Will roads be widened? How convenient is the house to a city center, schools and shopping, or to an interstate or other major highway? What’s the view?

FEATURES: Upgrades and amenities certainly add value to a home, although whether what they add approaches their cost to install as part of a renovation has to be taken on a case-by-case, feature-by-feature basis. Upscale finishes and fixtures — high-quality wood floors, stone countertops, premium appliance brands —no doubt bump up a home’s worth, as do features such as a swimming pool or oversize deck. But putting a granite countertop in a modest house in a rundown neighborhood isn’t likely to produce a great return for a seller, no matter how nice the stone or the job. It’s still about location, location, location.

SIZE AND LAYOUT: Same-size houses in a single neighborhood may have different prices per square foot based solely on design. In general, buyers place a premium on open-concept layouts, which tend to make a place feel bigger, as do high ceilings. In terms of pure square footage, giant is not always better. Buyers nearing retirement are less likely to want a gargantuan place or a second story — so an area’s demographics play an important role in a home’s worth in its particular location.

CONDITION AND AGE: Like people, some houses age better than others — due in no small part to how well they’re maintained. The older the home, the more important that it clearly show signs of proper, ongoing care. If the homeowner has kept records of services and repairs, all the better. A poorly kept house may be cheap to buy but expensive to own — and even difficult to insure.

CHARM: Again, like people, some houses are just easy to like. But bargain hunters should note that charm can be easy to fix. A well-built and maintained house with a cluttered interior, off-putting décor or an ugly front door can be a buyer’s best friend. It pays to look past the surface to a structure’s true value.

Ultimately, a house is worth whatever someone is willing to pay for it (and, if there is a mortgage involved, what a bank judges to be its value).

Are Automated Internet Valuations Accurate?

Online valuations are not reliable guides to a home’s worth and are not used by professionals for determining fair market value. Why? Because no one from any of the estimating web portals has toured the home in question or any comparable property. Automated valuation sites use generic formulas that pull information from public records and make assumptions based on information that may be dated or incomplete. If you are just curious, automated sites can give you a ballpark figure, but if you are making plans to buy or sell, enlist the services of a real estate agent or a professional real estate appraiser.

Create Your Own List of Comparables

To get a better ballpark figure without enlisting the help of a professional, you can search local newspapers and Internet portals (such as www.homesandland.com/) that list properties on the market in a given neighborhood. For a true comparison (called a comp), the properties should be the same type with similar layout. The location should also be similar (such as both on a golf course or on a busy street). Features should also be similar. Look for statistics on comps that are within one square mile of each other.

Professionals Are the Best Bet

“When you need an operation, you hire a surgeon not an electrician,” says Scott Kline, a real estate agent for more than 30 years. “When it comes time to make a major investment in real estate, you can up your odds for a better outcome by working with a professional in the business.”

Both professional real estate appraisers and real estate agents can provide reliable estimates of fair market value. Note that appraisers charge for this service, but real estate agents don't.

Real estate agents and appraisers who are familiar with the areas where you are buying or selling know more about properties in the area “because they have been in many of them,” Kline say. “There is nothing like seeing a property first hand to discover what amenities it has and what condition it is in.”

Note that even when these professionals give their opinions of value, there are no guarantees. Unforeseen factors can affect the ultimate selling price, such as when a neighbor suddenly decides to put three cars up on blocks in his front yard or a neighboring property falls into foreclosure.