The four faces of home value

We have a newer agent in our office who is also a licensed appraiser. I had an interesting discussion with him recently about the differences in “values” of homes, depending upon who was making the call. I’ve concluded that there are four distinctly different views of a homes value—all of them correct from the point of view of the person doing the value analysis—the four faces of a homes value.

The first and closest to the heart for most readers, I’m sure, is the homeowners view of the value of his/her home. Homeowners tend to come up with a value based upon combining what they think the place is on the local tax books for, plus adding the value for any improvements that they’ve made. A homeowner who finished his basement at a cost of $20,000 and replaced windows at a cost of $6,000 and put on a new roof for $5,000 thinks that they should get all of that money back in the price of the house when they sell. As you will see, that is not how the other three faces of value see it.

The second value arbiter is the local government assessor—the person who determines what your house is on the books for at the township/city level. These folks start with an appreciation formula that is a mystery to most. It combines state and local economic factors to determine how much the government says your house has appreciated over the past year (no matter what the market says). These folks are looking more at replacement cost than anything. What would it cost to build a replacement house of equal quality and features today. If you have been honest and done improvement work with permits, they will be more than happy to increase the “”value” of the house to include the cost of those improvements.

The next two faces are fairly close in the end number that they come up with, but with differing approaches. The mortgage appraiser is looking at your house in the context of the market, comparing it to other houses with similar features and size and trying to determine what is a reasonable number for the mortgage company to put at risk. Your realtor is trying to determine where your house fits in the current active market and how much someone might be willing to pay for it. The appraisers’ numbers might be a bit higher than the realtor, because appraisers tend to “bake in” a year or two of normal appreciation, albeit that is a low number these days. The appraiser might look at your $20,000 basement and give you $2,000-3,000 added value for it on his appraisal.

It’s not unusual for me to hear from a potential listing customer that he/she had an appraisal done for a recent re-finance and it came out higher than my recommended price. They normally go on to give me a whole list of improvements that they’ve made, some stretching back over years, as further “proof” that their house is worth more than I have suggested. Those are all nice marketing points, but usually I have baked them into my market evaluation already and I’m looking at the value today, not in two years. Trust me! I’m the only face (other than what you see in the mirror) that is working for you.