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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.
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.
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:
- Site characteristics – Is your home in a desirable neighborhood with good schools? Is public transportation available? How accessible is the nearest shopping by car as well as other means of transportation?
- Design and appeal characteristics – Is the layout designed for convenience? Does the house have curb appeal, meaning, is it attractive when viewed from the street?
- Construction quality – Was the original construction of high quality?
- Age and condition – If it is an old house, has it been properly maintained? Are there visible problems with the roof, siding, etc? Is the outside in need of a coat of paint?
- Improvements – Have you remodeled the kitchen or bathroom or added extra rooms?
- Amenities – Is there a deck, swimming pool or other special features? Is the backyard large enough to be used for parties and barbecues?
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.