If you want to know how much your house is worth, just ask … anyone. Your neighbor, your plumber, your father—they all have a great idea what the value of your house is.
That’s called either too much information or too many opinions.
The Three Rules of Valuation
When push comes to shove, you need to know three things before you start selling your home or investment property:
- There are so many different market conditions that are pretty much beyond your control—interest rates, supply and demand, the season in which you’re selling—that any value is going to change continuously.
- Buyers will always put their own needs above all else and seek to meet those needs in the most affordable way.
- The market value of your home is what someone else is willing to pay and not a penny more.
So once you start trying to figure out what your home might be worth, and you’re doing so with a Realtor, make sure you look at each of the following valuations and not only understand what each means — but how they’re formulated.
The Types of Real Estate Valuations
Fair Market Value (FMV): there is nothing more pure, but it’s so hard to know exactly what it is. FMV is the price that a willing buyer and seller agree on if everything else is equal, meaning that it’s done at arm’s length without any undue pressure. At the end of the day, all of the other forms of valuations are trying to determine FMV.
Comparative Market Analysis (CMA): The CMA is sometimes referred to as a Market Analysis or a Broker Opinion of Value. Realtors look at MLS, pull comparable sales, make adjustments for differing features, and establish a price at which the property is likely to sell in an acceptable time frame. The CMA is one of the best representations of FMV.
Assessment: This is the value that the city or county places on the property for purposes of calculating the amount of taxes. Any gap between an assessment and the FMV tends to grow larger the longer the period between sales of a property. Assessments are also using stale data—as much as 24 months old.
Appraisal: Banks hire licensed appraisers to get a determination of the value for the purpose identifying the maximum loan amount. They use the Universal Appraisal Report. Appraisers use the most recent property sales and then make subjective adjustments for property features, property conditions and market conditions. Appraisers cannot officially use properties that are either under contract or currently on the market in their analysis.
Zestimate: Okay, here we go. This is the online valuation made solely by a computer algorithm that supposedly uses thousands of data inputs to arrive at a valuation. The accuracy of the Zestimate is well known by now — it is not very accurate. Agents, home buyers, home sellers, appraisers have all weighed in and the +/- 10% accuracy is good when you need only a vague idea of a property’s value. But when true decision making is needed, the Zestimate is not a reliable tool.
The best method by far is the CMA.
The CMA is designed to find the value at the moment it is performed. A CMA looks back and looks forward in order to establish where the market is currently. Appraisals look to the recent past, assessments look to long past and the Zestimates look at, well who actually knows.
The clients who make the best decisions lean on the the Realtor CMA to drive their decisions.