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. For example, 91361 might have shown a price increase of 10 percent over the past six months, ergo you believe your home is now worth 10 percent more than it was.
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.
A real estate agent will send out a flyer that says something like, "Homes in your area have gone up 15 percent in value, want to cash yours in List with us."
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, indeed, somewhat valid measurements. If nothing else, they tend to give you the trend in values for your area, or at least a recent spot price. However, they are not really a highly accurate method of determining the true value of your home at any given time. Let's look at each separately:
Reports of Price Increases
These are typically compiled from sales figures and are for a fairly large geographical area, perhaps an entire city or zip code. The problem here is that within any area there are going to be prices that are higher as well as lower, often by significant amounts. Yes, your zip code might indeed have gone up by 7 percent or 11 percent or whatever, but your specific house could conceivably have gone down by 3 percent, or up by 20 percent. Geographical price increases show trends, but not specifics.
The tendency is to assume that whatever the nearby home sold for is the price of your home. (Many owners add a bit because they know their homes are better!) The problem, however, is that the nearby home might or 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.
Flyers from Agents
Again, these usually reflect price trends based on recent sales in your geographical area. However, they normally aren't specific to your home. Unless the agent comes out and gives you a complete analysis just for your home, the flyers tend mostly to provide hope, not necessarily pricing reality.
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 percent. Add in other closing costs and the total could cost you 8 to 10 percent in fees to sell your house. Assuming 10 percent, 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.
They say that the minute you drive a new car off the dealer's lot, it loses 10 percent or more in value. The same happens the minute you buy your home, not because it's gone down in price, but because it will cost you about that much in transaction fees in order to sell it.
All of which is to say that most of the methods we use to determine what our house is worth at any given time are at best only approximations. At worst, they could be miles off.
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