Homeowners across the country have been receiving good news lately about their home values -- they're rising steadily. In fact, the most recent Case-Shiller index posted gains for all 20 of the cities it measures, averaging 9.3 percent year-over-year gains in property value.
For those who plan to sell or tap into their home equity, this is a nice abstract concept, but what about individual property values? Data about the real estate across America doesn't help an individual property owner answer that burning question, "How much is my house worth?"
All Real Estate Is Local
That means it doesn't matter what's happening in the country or even on the other side of town. Property values are determined first by the home's location, then by its desirability relative to nearby houses -- that means the home's features and its condition. For example, the average home price in a neighborhood might be $200,000. One home might be smaller than average, need updating and have a nondescript view -- it might be worth $125,000. Another might have just been remodeled and have a lovely lake view -- it might fetch $300,000.
How to Determine Home Value
There are several ways to estimate home value -- the most common being
- Home appraisal
- Automated Valuation Model
- Comparative Market Analysis
- Broker Price Opinion
Home appraisers inspect the property, noting its condition, amenities, and issues that might impact its marketability -- weird floorplans, hazards, upcoming zoning changes. Then, they look at comparable houses that have sold recently, making adjustments for differences between the "comps" and the subject property. This is the most accurate way of determining home value. Appraisals usually cost between $250 and $750, depending on the size of the house and the complexity of the job.
Automated Valuation System (AVM)
Automated valuation systems, or AVMs, evaluate primarily by location -- they have no way of knowing if a specific house is in better condition or has more features than neighboring properties, although they can extrapolate it to some extent by looking at its previous sales price in relation to those of its neighbors. AVMs don't know if hazards are involved or if the owners have improved the place or made some ugly remodeling mistakes. They're useful in illustrating trends -- are prices in the neighborhood increasing or decreasing -- but less accurate in valuing specific property. One study indicates that the "best" AVMs come within 90 percent of the home's price, while the "worst" ones operate at about 70 percent. That means even the best ones can be off by $20,000 for a $200,000 house, while the worst ones might miss by $60,000!
Real Estate Agents: CMAs and BPOs
Homeowners could also consult with real estate agents, keeping in mind that if they think the owner might be interested in selling they might inflate the value a bit to gain a client. This service is often called a CMA, or Comparative Market Analysis, and many agents prepare them for free. Another alternative is asking (and paying) for a broker price opinion, or BPO. These could be thought of as "mini appraisals," in which the broker analyzes three recent sales plus three currently-listed houses in the neighborhood and estimates the value of the subject property from those. A typical BPO costs about $75 with an interior inspection and $45 without.
How to Calculate Equity
Once a homeowner has answered the question, "How much is my house worth?" the next question is often, "How much home equity do I have?" There are two ways to measure this -- a percentage and a dollar amount.
Calculating the percentage of home equity, which might need to be done when refinancing or taking out a home equity loan, is accomplished like this:
1 - (amount of loans secured by the property ÷ property value)
So, a residence valued at $180,000 with $107,000 in loans against it looks like this:
$107,000 ÷ $180,000 = .5944
1 - .5944 = .4056
The owner has 40.56 percent home equity. The current loan-to-value ratio is 59.44 percent.
Calculating the dollar amount is easier. It's useful for estimating the potential proceeds from selling the home.
Simply subtract home loan balances from the property value.
$180,000 - $107,000 = $73,000.
Of course, the most accurate and meaningful way to determine a home's worth is to see what a reasonable buyer with all the facts is willing to pay for it. But the above-listed methods are a bit more practical.