If you ask people what their homes are worth, chances are they’ll tell you it’s difficult to put a price on them. That’s because they are evaluating them through an emotional filter filled with happy memories they had while living in the houses. In reality, homes are assessed every day to see what tangible value they have on the open market and the factors used have nothing to do with emotion.
To understand how houses are rated, you need to begin with a clear definition of “market value.” In real estate terms, market value is the price at which something can be freely bought and sold within a reasonable period of time. The concept refers to the conditions necessary for a fair sale, meaning the buyer and seller are acting wisely and knowledgeably, and the price is not affected by any artificial stimulus. A reasonable time in real estate parlance generally means between one to three months.
Why is This Important?
If you’re considering putting your home on the market, you need to know the value of the house based on objective factors before you can set the asking price. Even if you’re not planning to sell, you should periodically reassess your home’s value so you can make sure you have ample insurance as the value increases. Obviously, the time to discover a property is underinsured is not after a tragedy strikes.
An experienced real estate agent can help determine market value with reasonable accuracy. These professionals focus on the conditions that make a home saleable. Home prices vary significantly from city to city and even from neighborhood to neighborhood. Your home needs to be compared with similar houses in the same or nearby neighborhoods.
Key Points in Determining Home Value
Here are some guidelines to consider:
Other Important Aspects
Another yardstick for measuring market value many realtors recommend is calculating the price per square foot. The method most commonly used is to divide the amount of livable square feet into the house’s latest appraised price. You can usually find the appraisal price from a property tax bill. Next, compare your result with the price per square foot of some of the homes that were recently sold in your area. You want to ensure that the price per square foot is in line with the neighborhood norm.
Finally, current market conditions are an important consideration. Real estate prices rise and fall regardless of the quality of the individual properties. Interest rates, the state of the economy and the local job market are all factors that affect the market value of homes in a particular area. When the market is down because of negative influences, such as high unemployment, the market value of your house can be lower than you think. Conversely, when the economy is booming, home values can go through the roof.
Bottom line: Whether your plans include selling your home, refinancing it, or just protecting your investment with adequate insurance, periodically reevaluate what your house is worth on the open market. Knowing what your home is really worth can be a valuable financial planning tool to help you deal with future events as life unfolds.
Generally, the purpose of remodeling projects is primarily to make the home more suitable for you and your family. That’s good, since the cost of remodeling is rarely recovered when a home is sold. But it’s also important to evaluate how a project can potentially affect your home’s resale value.
Some changes have widespread appeal – although popularity varies over time – and can significantly add value when it comes time to sell. Renovating the kitchen or adding a bathroom will likely bring a higher price, as well as increase the sales appeal of the house. On the other hand, a wine cellar may be an owner’s pride and joy, but don’t count on recouping the cost when selling, since a wine cellar may have limited appeal on the open market.
Another point to consider: You may have heard that it “doesn’t pay” to own the nicest house in the neighborhood. That’s because the selling price of a home depends partially on the characteristics and condition of the other homes in your area. Even if added improvements are popular, an owner may not be able to recover the cost if the enhancements price the home too far above others in the neighborhood.