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Assessing the True Value of Your Home

Everyone these days seems to be playing the money game in which you try to estimate the true value of your home. Knowing the current value of your home is important for a variety of reasons, not the least of which is to give you, the owner, peace of mind. But there are other reasons why it's important to know your home's value, including:

  • Determining your equity position
  • Determining your net worth
  • Determining how good, or bad, your neighborhood is becoming
  • Determining how much, if any, money you can afford to put into your home in improvement

Do You Know Your Home's Current Value?

Most people read the newspaper and guesstimate their home's value based on articles that talk about values. Typically these give percentage price increases (or decreases) by zip code. Another method that's commonly used is based on recent neighborhood sales. A house up the street sold for $450,000. Therefore, you believe your home is worth $450,000. Or you might have just bought and moved into your home. So your assessment is that your home is worth exactly what you paid for it.

All of these are valid measurements. If nothing else, they tend to give you the trend for your area, or at least a recent spot price. However, they are not accurate methods of determining the true value of your home at any given time.

Nearby Sales

The tendency is to assume that whatever the nearby home sold for is the price of your home. The problem is that the nearby home might not be similar to yours. It could have more or less square footage. It could be in better or worse shape. It could have a more or less attractive location and appearance, and so on.

Further, you don’t usually know the conditions of the sale. Did the sellers find a buyer who fell in love with the place and paid more than top dollar? Or were they forced to sell quickly at a lower price because of a forced job change, illness, divorce, or other pressure situation?

Finally, do you really know the sales price? Too often neighborhood gossip will exaggerate the price. Unless you get it from an agent who's taking it right from reported sales (or from the country assessor's or recorder's office), the price you hear might not be accurate. Nearby sales can sometimes do more harm than good by providing a false price base for your home.

Your Recent Purchase Price

What could be more accurate than the recent sale of the very home you're in to determine price? You paid $325,000 for your home, hence that definitively establishes its value, right? Not necessarily. You could have paid too much. Or maybe you got a bargain and paid far under market.

Further, just because you paid $325,000, that doesn't mean you can net that much if you sell. Assuming you could get the same price, there are still transaction costs. A real estate commission to an agent could be 6%. Add in other closing costs and the total could cost you 8 to 10% in fees to sell your house. Assuming 10%, your NET is only $292,500. That's if you want to sell it the day you move in and can get the same price you bought for.

CMA -- Comparative Market Analysis

This is what real estate agents live by. It's a scientific approach to determining the value of your home by analyzing recent sales. Unlike simply taking the sales price of nearby homes, it compares them closely to see how similar they are to yours. And it uses sales over the past six months to a year as a database.

Remember, the cardinal rule in real estate is that a realistic price has nothing to do with what you paid for your home, what you owe on it, what you've put into the property, or what you "feel" it should be worth. Price is only what the market will bear.

Call up any real estate agent, tell them you're interested in listing your home for sale, and they'll be out to give you a presentation that should include a CMA. They can usually spin it out of their computer from the local MLS (Multiple Listing Service) database in a matter of minutes. Keep in mind that you're under no obligation to list your property.

Become a Looker

Before actually getting a CMA, become a looker, a pretend buyer for a weekend. Go around to open houses and see what's out there. It won't take long to size up the market.

Analyze the Comps

What you need is a list of homes that have recently sold, sales prices (and original listing prices), and detailed descriptions of the homes. When you compare the houses on this list with your home, you'll get an accurate idea of what yours is worth.

Once you have a list of comparables, you make a judgment call about which homes are actually similar to yours. You can even drive by several of the most apparently comparable homes to confirm your choices.

Check that they have the same number of basic features: square footage, bedrooms, baths, and exposure on the street (corner lot, inside lot, flag lot, etc.). Next check the amenities. If your home has a pool, do the comps? What about air conditioning? A spa? Larger lot? And so on. Immediately eliminate those houses that are obviously dissimilar. Also, watch out for the oddball. If there is one sale on the list that seems suspiciously low compared with the others and another suspiciously high, throw them out. Chances are there was something unusual about the sale that you might never know about.

Be Sure the Sales Are Current

The real estate market is constantly in a state of flux. Prices that are more than six months old might be out of date. Your house could be worth considerably more-or less.

Be Sure to Check Only the Sales Price

These lists typically give both sales and a listing price. Normally, the listing price is much higher. Be sure you're looking at sales prices. You want to know what the homes actually sold for, not what prices the sellers initially hoped to get.

Check for Trends

Of course, with comps you're looking at past sales. However, the market is rarely static. Usually it's moving upward or downward. Now you can use some of those statistics that you might have been reading about in the paper.

For example, if you've noted that prices in your zip code are moving up at 10% a year and the comps you have are six months old, then adjust them upward by 5%. That should give you a more realistic sense of prices.

One way to help confirm trends is to ask an agent about inventory. This refers to the number of homes available for sale at any given time. Ask about how long it would take to sell the entire current inventory. This is given in months. Typically, anything under three months to sell the inventory indicates a hot market. Three to eight months is about average. More than eight months indicates a slow market.

Making the Comparison

Once you've identified the similarities and differences, add up the prices for all the comp homes and divide by the number, thus giving you an average value, which you can figure is probably the price you could get for your home.

The Bottom Line on Price

Okay, if you're going to sell today, that's what you might hope to get for your property. Of course, people generally pay slightly less than asking price, so you might want to bump it up a bit. Ask an agent how much lower than asking price homes are going for. It might be 5%, 10%, 0%, or in some hot markets, they might be selling for more than list. On the other hand, buyers are very price conscious. Price it too high and most buyers won't even consider making an offer on it. They'll think of you as an unrealistic seller.

Don't Forget Transaction Costs

We're doing this mainly as an exercise to see what your home will net out to you, what its value to you really is. In order to do this, however, we also have to subtract the costs of sale.


The most widely quoted commission rate is 6%. However, the rate is not fixed or standardized. It is whatever seller and agent agree upon. Studies have shown that the rate most commonly paid in recent years is closer to 5%. And there are many discount brokers who regularly charge less than that.

Of course, you tend to get what you pay for. If you want a full-service broker who handles all of the details of the transaction for you, from putting up the sign in front, to finding the buyer, to handling the closing, you'll probably end up paying top dollar.

On the other hand, if you're willing to do some of the work yourself, such as paying for advertising, showing the property, fielding phone calls, and so on, you can expect to pay less. And if you opt to sell FSBO or "By Owner,” theoretically there might be no commission at all to pay.

Even if you sell on your own "by owner," you can expect that most buyers will be working with an agent. They will want to use that agent to protect their interests in the deal, and they will expect you to pay that agent's fee. (Either buyer or seller can pay the agent, but it's been so engrained that sellers usually pay that buyers simply expect it.) A buyer's agent's fee is typically half the normal fee, usually between 2.5 and 3%. It usually will be your cost.

Title Insurance and Escrow

These can be paid by either buyer or seller or split. It usually hinges on local custom, although with the high fees charged these days, splitting is quickly becoming the most common. The fee will vary according to the price of the home that’s sold, market conditions, and which title insurance/escrow company you use. An old rule of thumb is that these fees were around 1 to 2% of the sales price.

Fix-up Costs

In order to sell your property, you will undoubtedly have to get a termite clearance (or else almost no lender will offer buyer's financing). Do you have termites in your house? How much will it cost to remove them and fix any damage they’ve done? (Usually a seller's cost.)

It's not uncommon for a buyer to demand significant repairs. The costs of fixing up your home for sale are the big unknowns. However, you might just throw in a figure to allow for it, knowing that it could be wildly off. A good rule of thumb is to estimate 2%. Thus you can add up your transaction costs.

Knowing Your Net

Knowing the net value of your home can be comforting, or disturbing, depending on how agreeable you find the figures. However, knowing is almost always better than not knowing--or guessing wrong. Remember that the net worth of your home is your equity, the difference between what your home is worth and what you owe. If the home is worth $276,000 after costs and you owe $200,000 on a mortgage, your equity is $76,000. That's the size of the check you'll get when you sell.

Remember, if you figure the value of your house yourself, you know how the price was calculated. And later on when it's time to sell, you'll know what your home is really worth. Any time an agent or buyer tries to knock the price down, you’ll have the confidence to hold to your guns and stick to your price.

Excerpted from Tips and Traps for New Home Owners by Robert Irwin. Copyright © 2005 by The McGraw-Hill Companies.

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