For many of us, our home is the single biggest investment we'll ever make. And just as we track the value of our other investments, it's wise to assess the value of our main property (as well as any secondary properties we might own) from time to time. Of course, the value of any home fluctuates based on market conditions and other factors. So the question is: How do you determine the current market value of your home?
First, you need to understand that the value of your home is not based on what you initially paid for it, how much you've spent to maintain or improve it or the fact that your brother insists he would pay a specific amount for it if he had the money. The value of any specific property is defined as "what a willing and able buyer would pay for it right now."
How to Get a Reasonable Estimate
There are no two properties in the world that are exactly alike. So it's virtually impossible to target an exact value of what any specific home is worth.
However, you can get a reasonable estimate — or at least a reasonably accurate range of estimated value — if you have detailed information about things like:
Physical attributes such as location, lot size and number of bedrooms and bathrooms,
Property tax information,
Historical sales data on the home itself, and
Recent sales of comparable nearby homes.
Is Zillow Accurate?
There are some consumer-friendly online websites that can give you an idea of what your home is worth. The most popular are Redfin, Zillow and Trulia.
The leading one is Zillow, with an average of 150 million monthly visitors. Using this free online platform, you can type in your property address and you'll get a "Zestimate" of your home's current market value. Zillow uses a proprietary automated valuation method that applies algorithms based on available data from tax records and sales data pertinent to your property's location to calculate your home's Zestimate.
Is it accurate? I've been using Zestimates for years in my real estate business, and I'd answer that question this way: Yes and No. Sometimes and often. Way off and dead on. If you think about it, the variance makes perfect sense — the output of any algorithm is only as accurate as the input data.
Zestimates are created by automated software designed by statisticians, and there is no ability for humans to manually alter the Zestimate of a particular property. And since every property is unique and the uniqueness cannot be included in the calculation, there's really no way to accurately estimate a property's market value using an automated process.
It's Better to Contact an Agent
A better way to determine your home's value is through a licensed real estate agent or broker who's very familiar with the area where your home is located. An agent has a wealth of real-time and accurate data at their fingertips in the Multiple Listing Service (MLS). And a knowledgeable and diligent agent can set up very specific search criteria and then mine that data to come up with a very accurate estimate of your very unique home's value.
Your agent will start by doing a comparative market analysis (CMA). This involves looking at comparable properties (comps) in the neighborhood that have sold in the last six months. Your property is the "subject property" in this analysis, and three comps that most closely match your house in size, age, lot size, roof type, amenities and style become the comparable properties.
Starting with the final sales price of each comp, the agent will adjust that price by adding or subtracting valuations of the difference between the subject property and the comp. If, for example, a comp has three bathrooms and the subject property has only two, the agent needs to adjust down the sales price of that comp so that it is more in line with the subject property. If the subject property has four bedrooms and the comp property has only three, the sales price of the comp will be adjusted up to be in line with the subject property. The amount to subtract or add varies by region, and that amount is typically far less than the initial cost of the feature.
As you can see, if the subject property was put on the market, it would likely sell for between $320,000 and $330,000. To determine the sales price at which to list your property on the MLS (your listing price), your agent would add together the final sales prices of the three comps and divide the total by three to get an average adjusted sales price.
Based on this methodology, your agent would probably recommend you list your home for $325,000. It's important to note that there is some subjectivity to doing CMAs. For example, does an extra bathroom add $5,000 or $7,000 to the property's value?
The Market and Appraisal Values
The listing price, while valuable, is really only an estimate of real market value. A seller may list his property for $325,000. A buyer might offer $300,000. If the seller accepts the buyer's offer, the market value is $300,000 — the price to which both parties to the transaction agreed.
Besides market value, there are other valuations in a home purchase transaction. The most accurate value is the "appraised value." Unless someone can purchase your home with all cash, bank financing through a mortgage lender is needed, and a licensed appraiser will be brought in to calculate the appraised value.
An appraisal is more detailed than a CMA — in addition to evaluating recent property sales and general home features, the appraiser will tour the home to factor in the current condition. Appraisers are professionals who come up with an exact number that reflects the value rather than an estimate.
As you can see, the market value (the price agreed to by the buyer and seller) is consumer driven. The appraised value is determined by experts. In other words, the appraised value is not necessarily the price that the property will be bought or sold for. In fact, properties generally sell for more than the appraised value. The lender will always use the appraised value when determining how much they'll allow the buyer to borrow, even if the appraised value is different than the market price.
The appraised value is also the valuation used for most other real estate-related purposes, such as determining an appropriate level of insurance coverage or the valuation for the purposes of calculating tax losses, estate liquidations and net worth.
It boils down to this:
Zestimates are free and will give you an indication of the market value of your home but are deemed to not be reliable.
A competent real estate professional can prepare a CMA that's a much more reliable and accurate valuation of your home. While it takes time to properly do a CMA, agents will often do this for you at no charge, since it's generally part of their service when you list your home with their broker. Assuming there are recent sales in the area that are comparable, a CMA will give you a very close approximation of the market price of your home.
The appraised value is the most accurate assessment of what your home is worth. But an appraisal is not cheap. It'll typically cost you between $600 and $1,000. And since it's only a snapshot at the time it's done, it quickly becomes outdated. Most appraisal reports are considered current for just six months from the date the appraiser stepped foot on your property.