How is Home Value Determined?
How do you know what your home is worth? There are many people, professionals and Automated Value Models (AVMs) like Zillow, Real AVM and others that try to determine what your home is worth.
For all the math wizardry of AVMs, they can’t tell the condition, amenities or location differences that affect your home. Like tax values, they are mass appraisals, averaging thousands of similar properties trying to determine your value vs a zeroed in focus on your home.
So use the above Get Value tool, Zestimate, neighbor, tax assessor, insurance agent or others for a general idea but understand it is an estimate and could be way off from reality!
Want to Know the SECRET to Your Homes Value?
The MARKET is the Secret to your homes value!
How Buyers Determine Home Value
Buyers determine home value primarily by comparison, condition, age and location. They develop their criteria like number of beds, baths, square feet, school districts and amenities and then compare your home to other homes for sale in the same location.
This is why you never want to overprice! Overpricing your home “to allow negotiation room” only makes lower priced similar homes look like a better deal.
Condition like move in ready trumps a fixer upper and located in the right school district or close to work and retail or recreation is also a huge factor. AVMs can’t judge emotion, condition or the appeal of one area over another to a particular buyer.
How Insurance Agents Determine Home Value
Notice how your insurance goes up every year. Insurance companies judge the value of your home by the cost to rebuild it. Materials and labor are ever increasing and may be in short supply driving up premiums.
They are not overly concerned with your mother in-law suite making your home more appealing to buyers as they are that they will have to pay for the extra bath and maybe a kitchenette than drives up the replacement cost. They are not as concerned about your school district as they are that you live in a hail or flood zone.
How Zillow Determines Home Value
Ah, the infamous Zestiment. Home sellers love them, Realtors hate them because we know the truth. A Zestiment is no more than a mass appraisal, a software algorithm that tries to predict value. Especially in Texas, Zestiments have a fatal flaw.
We are a non-disclosure state, meaning what your home sold for is not public knowledge. Zestiments are using tax values and factoring in what they may know about sales in a certain area from owners or agents that tell them.
Look at the bottom of Zillow’s own website footer and click Zestiment. They detail their accuracy and give themselves a star rating. You can drill down to county level.
Dallas-Ft. Worth is the forth (4th) largest metro area in population and Zillow’s own data gives it a two star rating. They are within 10% of the sales price only 58.8% of the time. So 58.8% of the time they could be 30K dollars off on the value of your 300K home!
That leaves you wondering about the other 41.2% of the time! Zillows own CEO couldn’t sell his home for his Zestiment . Pricing your Van Alstyne or Grayson County home by Zestiment would be big mistake!
How Neighbors and Friends Determine Home Value
This one is pretty easy, it’s hearsay! They “heard” so and so said or the home down the street sold for X. Normally, these values are embellished like the fish that got away stories or winning at Vegas.
Trust a professional vs your friend or neighbor so you have real facts.
How Realtors Determine Home Value
Realtors, like appraisers use the comparison method. We use our knowledge and experience to develop an opinion of market value. We evaluate properties actively listed, pending and sold to compare with your home.
What we bring to the table in addition to comparing by a market analysis (CMA) is our market knowledge of the area and experience selling in it.
There is a common saying in the industry that if an appraiser or Zillow says your home is worth X, then have them buy it. This is because for all the science of AVMs like Zillow and evaluations of appraiser and agents, market knowledge and experience is what counts.
Your home may be worth over a million dollars on paper based on an appraisal, the cost to build or another agents opinion but that does not mean it will sell for that. I recently had this discussion with someone who was told that their home was worth 1.2 Million.
Knowing that nothing had sold over 750K in the last year and that the small pool of buyers would compare it to 1.2 Million dollar homes in other areas, I knew it wouldn’t sell here at that price.. Cost does not equal value!
Realtors know what will sell and know “current market conditions” that affect value as well as the ability to successfully sell particular homes in different locations and markets.
How Mortgage Companies Determine Home Value
Mortgage companies use a variety of methods but the most prevalent methods are AVMs , Broker Price Opinions (BPOs) and professional appraisals. AVMs and BPOs are cost effective methods to get a quick idea if the loan amount even makes sense. Then an appraisal gets ordered when things get serious.
Keep in mind that the mortgage company is only concerned about meeting the value of the contract price. The home may not appraise high enough but if the buyer is willing to fork out more deposit skin in the game, they will make the loan.
They are concerned that there is enough value to cover the loan amount if things go south vs the actual value of the home.
How the Appraisal District Determines Home Value
Central Appraisal Districts do what is called mass appraisals which is why tax value and market value are different. For example they will look at all 2,500 sf homes in the county and determine that a 2,500 sf home most likely is worth X. They do adjust for location, age and other factors but the point is it is a “mass” vs a specific appraisal.
This may not know that you added a bath, enclosed a porch or added an outdoor kitchen. While they normally evaluate every year, by law in Texas, they must appraise your home every three (3) years so the figure you see at the Central Appraisal District could be three years old.
How Appraisers Determine Home Value
Appraisers can use several methods but for most residential evaluations they use the comparison method. They simply take similar properties in age, sf, location and amenities that were sold in a given time period and compare them to your home.
They make adjustments for differences like your extra bath vs the others and then give their opinion. Appraisals are recognized as the most accurate way to estimate market value – what a home will “likely” sell for.
By their nature, appraisals will always lag the market. They are looking at properties that sold within the last 90 days in most cases. The market could have drastically changed.
Some special properties or rural properties may require an even longer time frame to find similar properties sold for the evaluation process.
A common market change could simply be seasonal. The same home will likely sell for less in the dead of winter vs spring when it looks most appealing.
How Sellers Determine Home Value
Sellers ask their friends, neighbors, Zillow, look up homes for sale, tax records and guess. Much is based on emotion. They may have lived there 20 years, raised children, buried pets and had weddings there. These things are very valuable to sellers but not to buyers.
They may have remodeled putting wallpaper in every room or added a sauna, pool or other feature they feel increases the value but may in fact do the opposite.
Look at your past appraisal and notice what the appraiser valued. While most things have a value plus or minus there are just a few that affect your value enough for an appraisers adjustment.
Some of the most common home value adjustments are made for square footage, fireplaces, pools and general location factors like power towers, busy streets or retail backing up to the property.
The fact that you have a six burner commercial range with gigantic range hood vs an average range and hood may not matter much.
How The Market Determines Home Value
There is only one thing that determines real value and that is the market. Your home may be worth much more based on the cost to build, the solar panels, the 500 ft well but if buyers in your market don’t value those things as much as you do, it won’t sell.
This is known as the market has spoken. The home was exposed to buyers for a reasonable time at a particular price that could be completely fair and reasonable per the appraiser or agent but it didn’t sell.
An expired listing is simply the market speaking, saying the owner was the highest bidder. The owner put more value on the home than the buyers. Many things can affect what buyers will pay.
The bottom line is don’t guess, use a local professional that knows the market and make adjustments if the pricing is off. Don’t get locked into a number or needing room to negotiate.
Market values fluctuate for a number of reasons. It could be the competition of new construction, seasons, interest rates, jobs, environmental factors, schools, regulations, neighborhood changes or a million other things.
When people ask how is the market, there is a reason – change. Realtors live it everyday so we are your best source of on the ground information vs AVMs like Zillow. Call Keith Laursen with the Van Alstyne Homes Team when you want to buy or sell your next home.