Determining the value of a property is an art, not an exact science. We all see properties differently as depicted by the old cartoon showing how differently buyers, appraisers, sellers and the tax assessor view our homes. When someone asks me for an opinion as to their home’s value, I must guard against injecting my own personal feeling into the process. As an example, I like view properties. One reason we purchased our home was the Sierra views. Subsequently, I have a tendency to put a premium on view properties when calculating their value. Those feelings are not universal, however. View properties often have extreme topography. They are more difficult to maintain and are usually located in more remote locations of the county.
Appraisers are the recognized professionals at establishing the value for a home but I have often been critical of their work. Sitting on my desk are three appraisals of the same property. The first appraisal is dated October 2005 and the appraiser’s valuation was $970,000. The second appraisal was completed in August of 2006 by a different appraiser whose valuation was $1,020,000. The third appraisal was completed last week showing the property’s value now at $360,000.
OK, property values change but what about the size of a home? In the first appraisal the appraiser measured the house and said it was 3,852 square feet. The second appraiser measured the same house and reported the house had 3,749 square feet. I accompanied the third appraiser and we measure the house at 3,450 square feet. So what happened to the rest of the house?
In arriving at a home’s value, appraisers will compare what other homes of similar size and location are selling for. This is called the “sales comparison analysis” or “market” approach to establishing value. In the 2005 appraisal the appraiser used comparable sales as far as 15 miles away from the subject property and in the 2006 appraisal the appraiser used a comparable sale that was located in another county.
Appraisers also utilize a “cost approach” method in determining a home’s value.
The cost to build a home today may be substantially different from the current market value but in a balanced real estate market there is a close correlation between the two. Calculating construction cost is standardized by using the nationally recognized Marshall & Swift Cost Manual which calculates the average cost to build most everything in different regions of the country. Once the appraiser determines what it would cost to build the home using today’s numbers, they will subtract depreciation and add a “site value” for a final value determination. The site value in the first appraisal was $390,000. The second appraiser 10 months later valued the parcel at $218,000 and the most recent appraiser said the land was likely worth $75,000.
Like any asset we own, I suspect most homeowners are curious about their home’s value. We are likely more curious, however, when property values are going up than going down. When the value of our home is rising we feel more confident and secure knowing we made a good investment decision. When property values are falling, our anxiety level becomes elevated.
A few years ago increasing property values became the frequent topic of general conversation. Everyone had a story or knew someone who was making big bucks buying and flipping. Cruising builders’ model homes was a Sunday pastime for many. Some homeowners frequently tracked the appreciation rate of their home. It was in this constant valuation environment that Zillow was launched in February of 2006.
Zillow is a real estate website offering visitors an instant estimate of their home’s value called a “Zestimate.” A quick check of Zillow’s estimate for my client’s house showed the home’s value is $489,625. While the novelty of inserting any address into their search feature and have a Zestimate in seconds is satisfying, it is more often inaccurate. Zillow uses location as their primary valuation vehicle. Zillow doesn’t take into consideration pricing and the home’s condition. The Zillow’s algorithm incorrectly assumes that the neighbors’ home is comparable to all other homes regardless of additional features or upgrades made over the last few years. The trashed bank REO down the street becomes a valid comparable sale for the neighborhood.
Real estate agents are often asked by homeowners to provide them an opinion as to the current value of their homes. Some homeowners may be considering refinancing and need a certain value in order to refinance to a lower interest rate. Other homeowners may be questioning the accuracy of their tax assessed value and still others are consider selling their home and need to know its likely selling price.
Real estate agents and appraisers are licensed by two different regulatory agencies. When an agent performs a property valuation it’s called a CMA, competitive market analysis, or BPO, broker price opinion. Both agents and appraisers use the same information primarily found using MLS data on home sales of similar size and location to the property in question.
Anyone can place a value on a property but the price a homebuyer and seller willingly agree to, each acting prudently and with knowledge, without undue influence is considered the best definition of “market value.”
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his website at www.kencalhoon.com.