How much is my house worth?

When getting a home value estimate, consider the three main types of valuation:

  • Fair market value: Fair market value encompasses what your home looks like to prospective buyers compared to other homes in the area. Consider the sale price of a home that’s similar to yours (same number of bedrooms and bathrooms, square footage or outdoor space, say). If you work with a real estate agent to help you sell your home, this is where your agent will start: by looking at comps to gauge what buyers have been willing to pay for a property comparable to yours.
  • Appraised value: While the appraised value of your home factors in comps, it differs from fair market value. To calculate appraised value, a licensed appraiser considers the location, size and condition of your home, and any renovations you’ve completed. The appraised value is what mortgage lenders look at when a borrower buys a home or refinances their mortgage.
  • Assessed value: The assessed value is the assigned dollar value of your home used by local county tax assessors to determine property taxes. “Tax assessors calculate assessed value based on various factors, which may include the appraised value and the fair market value, as well as any home improvements, whether you generate income from the property, and any tax exemptions,” explains Jade Duffy, a Realtor with TXR Homes based in Carlsbad, California. Usually, the assessed value is lower than fair market value and doesn’t actually represent how much a property could sell for, Duffy says.

Bankrate insight While an online home value estimator can be helpful in getting a sense of what your house is worth, the number you see is only a starting point, not the final word.

What Determines the Assessed Value of a Home?

An assessor looks at information about your property and neighborhood, while comparing it to other properties in your area, to determine the assessed value. The assessor uses the market approach, which is a method to estimate the value based on the selling price of similar homes. This approach is used to find the market value of the property and determine the assessment rate. The market value and assessment rate are then multiplied to get the assessed value, as demonstrated below.

The assessment rate is a percentage of up to 100% that takes into account factors that could raise or lower the value of homes in a given area. These factors include current market conditions, other home values, maintenance cost, depreciation, home improvements, neighborhood, size, amenities and any other factors that the assessor deems important for an accurate valuation. The assessment rate is generally the same for every property in a given tax jurisdiction.

In many cases, assessors use an algorithm to determine the assessment rate and market value of a home by inputting general information about each property and comparing it to similar properties. This is generally used as a standard for all homes in the area, but can also lead to inaccurate valuations in individual cases.

The higher your assessed value, the more you’ll pay in taxes. Distressed areas tend to have lower assessed values due to the neighborhood quality, while areas with larger populations and more economic activity have higher assessed values. These values are public and are found in property records. When you consider buying a house, you can look up the assessed value and compare it to the asking price. However, the assessed value is only adjusted annually, and may not accurately reflect what a homeowner would sell at or what a buyer would pay for a home.

Video

Commercial Property Investment 

A whole new level of math is involved in commercial investment. Lenders use some very specialized calculations to determine whether to finance purchases or projects.

Choosing which valuation and profit calculations to use depends on your goals and the property type. You probably won't be all that interested in cap rate and other multi-family-oriented calculations if you're an investor buying single-family rental properties.

Where Else Does Fair Market Value Apply?

Fair market value isn’t just for those buying and selling real estate. Realistically, every current homeowner needs to stay knowledgeable on the FMV of their home, as this not only affects their net worth and the value of the asset itself, but a variety of potential financial concerns, from taxes to insurance.

Insurance Claims

Homeowners insurance takes into account the fair market value of the home when determining how much to charge for a policy, including how much it would cost to replace the home (in the event of fire or flood, for example.)

This “cost to replace the home” is an important distinction, as replacement cost of a home is determined by current fair market value and not necessarily what you paid for a home.

Remember, fair market value is determined by what the buyer and seller both agree to pay. For example, if you had a homeowner who needed to sell the home quickly to take a job in another state, maybe the buyer paid less than the home’s actual value at that time. Alternatively, if homes in your neighborhood suddenly become very popular, the replacement cost would go up to accommodate for this fluctuation in circumstances.

Taxes

Fair market value of a home is also used to calculate a homeowner’s property tax bill each year. Each municipality has its own tax rate. For example, if your home is appraised at $300,000 fair market value and the property tax rate in your county is 3%, you would owe $9,000 in property taxes each year.

Fair market value also affects other taxations where property and real estate are in play: the estate tax, gift tax, and inheritance tax. If an heir receives a home in an inheritance, or as a gift, they’ll have to pay property taxes on the fair market value of the home – regardless of how they came to own the property or someone “gifted” it to them for free.

Legal Disputes

Fair market value also becomes a very important (and often hotly contested number) when it comes to settling legal disputes: such as during a divorce settlement, when damages are done to private property, or when two heirs are given one piece of property and one needs to buy out the other.

Fair market value keeps all parties on the same page as to the value of any and all shared assets and keeps one party from being able to take advantage of the other.

Key factors that influence home value

Home values are usually based on comps, but it’s important to consider a home’s key factors when choosing comps to use. For instance, if a similar, nearby home sold recently, but it’s in a slightly better location, it’s probably worth more. How much more? That’s up to the buyer to determine.

Location

Many features of a home can be changed by the owner — like finishes and even home size. But, you can’t change where the home is located. That’s why location is such an important factor in a home’s value. Outside of standard market appreciation, a home’s land will only increase in value if the area around it improves. For example, 60% of buyers say being in a walkable neighborhood is very or extremely important, according to the Zillow Group Consumer Housing Trends Report 2019.

Here are key location factors that can increase a home’s value:

  • Proximity to urban core
  • Cul-de-sac location or dead end (less traffic)
  • Farther away from railroad tracks, airports, freeway noise and power lines
  • Near parks or green spaces
  • Sidewalks and walkability
  • Proximity to public transit
  • Waterfront, water or mountain views

Job market

When the job market is strong and incomes are growing, people may look to buy a home, or move into a newer or larger home, increasing the demand for homes and boosting competition among buyers.

Property taxes

Budgeting buyers look at their monthly housing payments including taxes, so homes with very high property taxes can be out of reach for some buyers. However, property taxes help pay for public services that benefit the local community. As a buyer, you’ll have to determine the value of savings versus local benefits.

Interest rates

Buyer demand tends to be higher when long-term interest rates are lower, as low interest rates give buyers more purchasing power. Conversely, when interest rates are high, buyers may have a harder time paying off other debt, which can impact their ability to buy a home. When demand is lower, housing prices follow suit.

Home maintenance

While not directly related to a home’s value, buyers may also want to consider any maintenance needs they’ll have to pay, especially in the first year of ownership. For example, will they have to replace the water heater or service the HVAC system?

Differences between Assessed Value, Appraised Value, and Fair Market Value

Assessed value, appraised value and fair market value are often used interchangeably, despite the fact that they are quite different. Below, we have compared these three terms to give you a better understanding of what each value means.

Assessed Value Appraised Value Fair Market Value What it isA yearly estimation of a property’s valueAn expert’s best estimate of what a property is worthThe price a property would be expected to sell for in a free marketWhat it doesDetermines the value of a property for tax purposesHelps determine whether the free market price is appropriate and is used for loan purposesDetermines the cost of a home that a willing seller and able buyer agree toWho calculates itPrepared by a municipal property assessorPrepared by a professional appraiser, who must do a complete visual inspection of the interior and exteriorPrepared by the seller or real estate company and negotiated by the buyerFactors that determine the value Market Value or Appraised Value Assessment Rate Comparable properties (sales and value) Current market trends Location Size Type of construction Condition of home Amenities Appliances Utilities Interior and Exterior Home Improvements Comparable properties (sales and value) Current market trends Location Size Type of construction Condition of home Amenities Appliances Utilities Interior and Exterior Home Improvements

Fair market value should not be confused with asking price. For a common example of appraisal forms, see Fannie Mae’s Uniform Appraisal Report for single-family homes.

As shown from the chart, assessed value, appraised value and fair market value are all used to determine a home’s worth, but have different meanings, purposes and calculation methods. The assessed value is calculated by a municipal property assessor and is recalculated each year to determine a property’s value, which is then used for tax purposes. In comparison, the appraised value is prepared by a professional appraiser to estimate a property’s worth, and is used for loan purposes as well as determining whether the market price is accurate. Lastly, the fair market value is the price a property would sell for in a free market. It’s technically calculated by negotiations between a willing seller and an able buyer.

A Calculation Example 

A six-unit apartment project might yield $30,000 net profit from rentals. Determine the capitalization rate from a recent, comparable, sold property. Now divide that net operating income by the capitalization rate to get the current value result.

Let's say your comparable sold for $250,000. You've determined that the property's NOI after deducting applicable expenses is $50,000. Divide that by the $250,000 sales price. You have a capitalization rate of .2, or 20%. 

Assuming a capitalization rate of 20%, $30,000 divided by that percentage is $150,000. This would be the current value.

3. The income approach

The income approach allows investors to estimate a property’s value based on the income it generates.

“This is Real Estate Investing 101,” says Sanchez. “Here, you’re being more specific about the costs of taxes, insurance, vacancies, and repair and maintenance to calculate a net return.”

The income approach uses two variables: the net operating income (NOI), which refers to a property’s income after all expenses are paid; and the capitalization rate, or cap rate, a percentage that expresses a property's estimated NOI as a percentage of its market value.

How to calculate the income approach

Let’s say an investor finds a home that generates $24,000 a year in rent, with annual operating expenses of $3,600. So the property will generate $20,400 a year. The current cap rate on single family homes is 5.5 percent.

$20,400 / 0.055 = $370,909

The property’s market value would be about $370,909.

“What’s unique about single family rental homes is that not everyone who is investing in the home puts much weight on the income it generates,” Sanchez explains, such as a buyer who might not be an investor. “They might just want good schools.”

How often should I check my homes value?

While you don’t need to revisit your home’s value too often, checking on it periodically, such as once a year, is a smart move for several reasons. Knowing the current value of your home allows you to determine, for example, whether your homeowners insurance policy still adequately covers the property.

“The value of your home also affects your taxes,” Reed says. “You might be able to lower your assessment.”

It can also be helpful to know the value of your home so you know how much equity you’ve accumulated, which could allow you to qualify for a home equity loan or line of credit, or cash-out refinance.

Of course, knowing the value of your home is very important if you’re considering selling. You’ll know where you stand with buyers, and what you could potentially take home after the costs of the transaction and taxes.

What are comps in real estate?

Comps (short for comparables) are similar, recently sold properties that agents and appraisers use to help determine the value of a home. Comps are used for multiple purposes: to determine the listing price of a home about to list on the market, to help buyers determine a fair offer price and to help an existing homeowner find out the current value of their property and potential equity.

Comps usually consider five key criteria when calculating a home’s value:

Timeline: In a typical market, comps include homes sold in the past three to six months.

Location: Comps should be pulled from the same neighborhood, and in close proximity to the home in question. In an urban area, comps are usually within a mile or so. In rural areas, the radius comps are pulled from will be larger.

Home size: Comps should have the same number of bedrooms and bathrooms, same number of stories and a similar square footage. The lot size and presence of a garage or basement should be similar, too.

Features: Comparable homes should have similar amenities and level of finishes and updates.

Age: The homes being compared should be roughly the same age. Newer homes have newer designs, layouts, systems and appliances, which can increase value.

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