Intrinsic value – no such thing for houses…

Recently I blogged here about appraisals and the negative impact of low appraisals. That begs the more fundamental question about the value of houses, which may be explored by trying (as we all do) to answer the question, “What’s my house worth?”

The correct response to that question should be another question back to the homeowner – “Worth to whom or for what purpose?” In reality most homes have little or no intrinsic value. There is value in the land that the house sits upon and if one reduced the physical structure to piles of the wood, metal, glass and other content that make up a house, there would probably be some salvage or scrap value to those materials.

There are many different ways of looking at or determining the value of a home, depending upon who is asking and for what purpose. There is what we realtors try to determine and hope to achieve, which is the so-called market value – what is someone else willing to pay for the property. Then, as was discussed in the blog about appraisals, there is the loan value of the house – what will some lender loan against the property. That seems to be some factored variation on the market price. Then there is the assessed value – what the local tax assessor says the property is worth for tax purposes. There is also an insured value – what your insurance company says it would cost to rebuild the house if it was totally destroyed.

Which of these “values” is correct? They all are. They are values that are established for different reasons and to serve different purposes. Realtors certainly hope that the market value that they come up with and list the property for sale at is close enough to the appraised value of the buyer to be able to get whatever mortgage that they need. Homeowners are conflicted. They would like the assessed value for tax purposes to be as low as possible, but they want the appraised and market values to be as high as possible when it comes time to sell. The homeowner might also wish that the replacement value, which drives the insurance bill, was a little lower.

Some homeowners might be surprised that the efforts that they made to lower their tax bills, by fighting with the local township or city over the assessed value could come back to haunt them. After all, Realtors have access to the Public Records Database (PRD) and the homeowner than was successful in convincing the tax assessor that his property is only worth $200,000 can very well turn around and claim that it is really worth $400,000 when it comes time to sell. Well, he can; but his listing agent will have some explaining to do to potential buyers and their agents.

The insurance thing is a bit more complex. I’ve had owners tell me that they won’t sell for less than the place is insured for – the replacement cost. That’s not a very realistic view of things. A home built for $100,000 in the late 80’s might have a market value of $200,000 today, but is could also have a replacement cost of $300,000, just due to the impact of inflation and current building costs today. Insurance values are based on things like square footage and finish quality and the current cost per square foot to build a place of similar size and quality. In some cases, replacement would really be impossible. I live in a historic home that was built in 1885. If it is destroyed no amount of rebuild money will ever really replace it.

So what is the value of my home? I bought it in 1999 for $305,000. It went way up in “value” during the boom (at one point nearing $400,000 at market prices) and then way down in the bust (now hovering around $275,000 at what I estimate its market value to be). My insurance company has it insured for $425,000 to rebuild, but the tax man says it is only worth about $260,000. I don’t know what an appraiser might put it at, and I suspect that I don’t want to know right now. Which of these number represents what my house is worth? All of them, depending upon who is asking and for what purpose. So, what’s your house worth?