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Thursday, September 3, 2009

What's the value of my home?

One of the biggest confusions that I see in this job is how people (primarily sellers) misunderstand the “value” of their home. I think it’s because there are so many ways value is assigned to a property. In an effort to clear up the confusion, let me try to explain the differences between the three major ways we encounter value as real estate professionals.

What is Market Value?
Market value is like reality TV.
It’s a constantly moving picture in real time. The market value of the home is tied to current market conditions – just in the same way commodities and stocks are. Market value is subject to interest rates, available financing, unemployment, housing trends, demographics, and all the other factors that go into setting market conditions. One day the market value may be up – the next day down. Because with our North Shore real estate market we have been accustomed to seeing housing values go up, it's it's a bit hard to absorb the fact that values of homes can also go down.

Market value is based pretty much on supply and demand. When demand goes down, generally sales prices do as well. So even if you paid $900,000 for your house in 2005, put in a new kitchen and new bathrooms, you may still find out that your house is worth $850,000 in today’s market. It’s just like buying Google at $500 a share yesterday and finding out it is worth $450 a share today. As with stock, all housing "losses and gains" are just on paper until you actually sell your house. While your house may have been sell-able for $1,000,000 in 2006, that "gain" was just theoretical; not reality. Until you sell the house, you really won’t know what the market value is, because the market value is what a buyer is willing to pay for your house on a given day. It has nothing to do with what a seller wants or needs from the house. The buyer determines the market value – not the seller.

What is Appraised Value?
Appraised value is like a snapshot. When you look through a photo album, a woman can be depicted as a baby, a teenager, a mother, etc. She is still the same person, but at a different point in time. That’s what appraised value is: on this day, in this year, by this appraiser – the house was appraised at $850,000. While appraisals provide an objective opinion of value, it’s not an exact science so appraisals may differ. For buying and selling purposes, appraisals are usually based on market value — what the property could probably be sold for on that day. Other types of value include insurance value, replacement value, and assessed value for property tax purposes.

Appraised value is not a fixed number. Changes in market conditions can dramatically alter appraised value. So if you had your house appraised in 2007, the number would more than likely be very different today. Appraised value does not take into account special considerations, like the need to sell rapidly. Lenders usually use either the appraised value or the sale price, whichever is less, to determine the amount of the mortgage they will offer.

What is Assessed Value?
Assessed value is almost like a composite photo. This is what the theoretical market value of the house was in 2006, 2007 and 2008. So if we put that all together then this is a "photo-shopped" picture of the house – in retrospect. It feels a little backwards in some ways – when properties values are going up, then the assessed value often seems a little low; but today, when property values are going down, then the assessed value seems a little high.

I got a newsletter from the Shield’s Township assessor that I thought explained assessed value very well. If you would like to read further, go to

What does value mean to buyers and sellers?
If you are planning on selling your property, then the only way that it makes sense to price it is based on today's market value – you’re putting your house on the market. Buyers could care less about how your house may have been appraised in the past or even what it might have been worth 3 months ago -- it's all about today. Consider a house that was on the market on September 10, 2001 versus the very same house on September 12, 2001... the landscape of the market shifted radically due to no actions taken by the seller and yet sellers needed to adjust to the market.

Just as an investor might evaluate buying shares of Proctor & Gamble versus Kimberly Clark, home buyers are comparing your house to every other house on the market, therefore they need to "e-value-ate" it in that way. Hope this helps explain value.

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