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 be on most everyone’s mind at some level. Perhaps the shocking realization that real estate prices don’t go in only one direction contributes to this phenomenon. But whatever the source, people can’t seem to get enough of online real estate valuation models such as Zillow’s Zestimate.
There are various ways of coming up with what is, in reality, an estimate at best, regardless of the sophistication of the method or practitioner. Until the house is actually 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 or two 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 and compare and contrast 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, say for buying with or refinancing a home loan.
The appraisal process involves a visit to the property by the appraiser, along with extensive investigation of similar properties that have sold in the recent past. Optimally, all of the properties used to compare with the subject property had no special conditions of sale, such as requiring a short sale or ownership by a bank following foreclosure. It is helpful if several similar properties can be found, some superior to the subject property and some inferior. The appraiser, based on her knowledge and experience, will make adjustments to the value she is 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.
In addition, appraisers attempt to determine that a transaction was clean: arm’s length, no special concessions (such as the seller paying some of the buyer’s closing costs), and nothing extraordinary that might have impacted the sale price. Once all of this has been accomplished, a lengthy form is completed 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, not on an average of all the sold prices, prices per square foot, or any other rote 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 tend to be much less rigorous. One exception is a BPO performed by a listing agent representing a bank on a foreclosed property, which requires much the same data, paperwork, and time as an appraisal.
Most often, BPOs are prepared as part of a listing presentation made to a home seller whom the agent is hoping to represent. These can range from a superficial review of comparable sales with the prospective client 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 spits out a value for any home you might be interested in, whether currently offered for sale or not. Probably the best known to the general public is the aforementioned Zestimate, produced by Zillow, although proprietary AVMs are 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 or part of town, the AVM is blind to that. And of course the 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 tract home neighborhoods with lots of sales. Older neighborhoods, where some homes have been totally upgraded, some have not been upgraded but have been well-maintained, and some are in poor condition, are notoriously difficult for AVMs to price realistically. Similarly, values in custom home neighborhoods, where the houses are each one of a kind, are much more difficult to assess by AVM.
The other problem with AVMs is a result of 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…some would argue, you get what you pay for…but are always 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.