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<\/a>What is property value?<\/h2>\n
Property value is how much a house is worth (or would be worth) if the owner were to list it for sale today.<\/p>\n
That said, there\u2019s some nuance and subjectivity to property value. The same house could be worth different amounts to two different buyers, for example, if it has a feature that one buyer strongly desires and the other buyer can take or leave.<\/p>\n
Ricky Ruiz<\/a> is an agent in Las Vegas<\/a> who completes 15% more sales than other agents in his area. He points out that if homebuyers go to the three major real estate portals \u2014 Zillow, Trulia, and Redfin \u2014 for property values, \u201cyou\u2019ll get three different numbers, so you should at least look at all three,\u201d when estimating a property\u2019s value.<\/p>\n Property value is typically determined when a property is bought, sold, or assessed for tax purposes. Depending on the situation, a different professional will determine the home\u2019s value.<\/p>\n Real estate agents might help a seller determine how much a house is worth when it\u2019s listed for sale. Typically, a listing agent will\u00a0 prepare a comparative market analysis<\/a>, looking at recent sales in the seller\u2019s area, to determine the selling price. But pricing a house can also be a strategic decision \u2014 the agent might advise a seller to underprice a house in hopes of sparking a bidding war.<\/p>\n Ruiz thinks that the downside of using an online property value to set a home\u2019s selling price is that these models \u201ccalculate things in the past from a market value standpoint, and you don\u2019t want to list where the values have been<\/i>, but where they\u2019re going<\/i>.\u201d<\/p>\n Because automated valuation tools use public records to determine how much similar homes sold for, they lag the market. There can be weeks or months between when a house is listed for sale, an offer is made, the deal closes, and then it’s recorded publicly and available to the AVM. Since it can take two or three months from when the house was listed for sale for the model to factor that sale into its comps, a human is going to know better than a computer what is happening right now just by virtue of the data lag.<\/p>\n As a result, an experienced agent could suggest that you offer more or less than a property\u2019s list price.<\/p>\n A house will be bought and sold for what the buyer and seller agreed in the offer if the buyer is paying cash. With an all-cash purchase, the house is worth what the buyer is willing to pay (though it would be a good idea for them to get an independent appraisal<\/a> to confirm the home\u2019s value; after all, it\u2019s a big investment!).<\/p>\n If the buyer is getting a mortgage, then the lender also has a stake in the home\u2019s value. The lender wants to make sure the house will be worth enough to recoup their investment if you stop making payments on the mortgage loan and they have to foreclose. So they\u2019ll have a licensed appraiser<\/a> determine the home\u2019s market value.<\/p>\n Tom Cullen is a licensed real estate appraiser<\/a> certified by the National Appraisal Institute, and he has been appraising homes for more than 30 years.<\/p>\n According to Cullen, \u201ca full appraisal includes a thorough inspection of the property, both interior and exterior. Appraisers are looking for quality, condition, and attributes that would make that home more or less valuable than the comparable sales in your area.\u201d<\/p>\n An appraiser has years of training and certifications supporting their calculation of a property\u2019s value.<\/p>\n A tax assessor also calculates a home\u2019s property value regularly for tax purposes. In some states this is done regularly, which can mean annually (such as in Massachusetts), or at intervals as long as five years (such as in Idaho). In other states, the assessment is\u00a0 done when the home changes hands and then will be increased by a certain percentage annually (such as in California).<\/p>\n The government has an interest in knowing how much your home is worth; if property values aren\u2019t reassessed on a semi-regular basis, it could result in over- or under-payment of property taxes.<\/p>\n Appraisers almost always calculate property value through comparable recently sold listings, or comps, but insurance companies and tax assessors use other methods.<\/p>\n When an appraiser determines property value with a sales comparison approach, the appraiser looks at recent sales in the vicinity and figures out which sales best match the house they\u2019re appraising. They try to find comps that are as close to the house being assessed as possible \u2014 comps with a similar number of bedrooms and bathrooms, square footage, lot size, and number and type of outbuildings.<\/p>\n The cost approach of valuation is a method of calculating property value most often used by insurance companies.<\/p>\n When you purchase a homeowners insurance policy<\/a>, you can typically select from two different coverage levels: one that would pay out the current market value of the house, or one that would pay to rebuild the house from the ground up, which is typically the more expensive option.<\/p>\n The replacement cost approach calculates the cost to rebuild at current market prices for materials and labor. Because it almost always results in a higher cost than buying an existing house, the premiums on a policy with replacement coverage will be higher.<\/p>\n Tax assessors calculate value<\/a> depending on how much sales prices have increased in the county or area. They use a formula that can vary nationwide. Some cities offer exemptions for a portion of paid property taxes, and many cities and counties may charge higher taxes for an income-generating (or rental) property. Assessors make adjustments for differences between comparable properties, subtracting value if your home has one fewer bedroom, or adding value if it has an ocean view.<\/p>\n Because each of these professionals is calculating property value for a different purpose, you can expect to see some variation in values.<\/p>\n Automated valuation models<\/a>, or AVMs, use some of the same data as an appraiser or tax assessor.\u00a0 But they\u2019re calculating value for a different purpose \u2014 to draw eyeballs to the website for marketing and lead generation purposes. While they try to get it \u201cright,\u201d they lack the experience of a local agent in your market.<\/p>\n Here are five reasons why an online property valuation tool might get it wrong.<\/p>\n Some AVMs have a wider margin of error than others. According to Cullen, \u201cthe places where those values work well are larger states with homogenous neighborhoods where the only difference from one home to the next is one has a one-car garage, and the second home has a two-car garage.\u201d<\/p>\nWho determines property value?<\/h2>\n
Real estate agents and buyers<\/h3>\n
Mortgage lenders and appraisers<\/h3>\n
Tax assessors<\/h3>\n
How is property value calculated?<\/h2>\n
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<\/a>Do online property value tools work?<\/h2>\n
Data issues and automated valuation models<\/h3>\n