Sunday, September 21, 2008

What is My House Worth?

As an investor part of my job is to keep tabs on my investments and assess the performance. One of the measures in real estate is the equity (and equity growth) in each property I own. Equity is defined, in its simplest form, as ownership. All of the homes I "own" have mortgages so I my equity is only a part of the total value of the home and the lender owns the rest.

To arrive at the amount of my equity I use this formula ASP-SC-MSE-AO=equity where

ASP=anticipated sales price

SC=sales commission

MSE=miscellaneous sales expenses (such as a fresh coat of paint or other minor repairs)

AO=amount owed

Here is how this works - I believe I can get $145,000 as a sales price within 30 days of putting the home on the market, I will pay 6% sales commission, I will have $1,500 in make ready expenses and the amount I owe is $96,000. $145,000-$8,700-$1,500-$96,000=$38,800, so my equity in this property is $38,800.00. It is important that I use an ASP which will allow me to sell the house within thirty days. If I pick an ASP too high there will be additional costs of sales which increase as time on the market increases.

If you use a program like Intuit's Quicken or Microsoft Money to track your loans and associated assets the formula used for equity omits the cost of sales. Their formula will only include ASP-AO=equity so they will show an equity position of $49,000. This is quite a difference.

The biggest variable is to decide what would be the current sales price of your house. One of the attractive things about stock ownership is you can look to the stock exchange and get a fairly accurate idea of the value of your stock at that specific time. With stocks or real estate the most important number is the price at the time you actually sell, but it is much harder to make a decision on when you should sell real estate because it is harder to determine the value of the unique property you own. The share of IBM stock you want to sell is identical to and has almost the exact same value as the share of IBM which was most recently traded on the stock exchange. So how do you track or determine the value of your house so you can make good buy or hold decisions?

Option 1) Look to the tax rolls

Option 2) Use a realtor to get an Comparative Market Analysis (CMA)

Option 3) Pay for a professional appraisal

Option 4) Ask an expert in the market (a Realtor) for an opinion based on their experience

Below is a deeper discussion on each method and when you want to use each method. It is important that you decide why you are looking to understand the the value of the home and use the appropriate method for determining the value.

Option 1:

Look to the tax rolls. In our markets the local taxing authorities are supposed to value a home based on what it would sell for on the open market. This works best when you have a fairly homogeneous market and your home tends to be an average home. If you want to get an idea within 5% of a true number, you can usually use this as a starting benchmark. If you do not need to make a hard decision, but you just want to know what your net worth is then you will probably be well served with this number and no additional research.

Option 2:

Use a realtor to get an CMA. A CMA compares your house more closely with product just like the home you own. This is a more intensive analysis and you will find out additional information. The data used for a Realtors CMA is more current then what is used for tax valuations. You may find that the market has trended much higher (or lower) in the last six months. The other piece of information you get in a CMA is the time on market before each house sold, what was the original asking price and if the house had to be reduced in price before it sold.

Option 3:

Pay for a professional appraisal. I like this option least of all. An appraisal is usually performed in order to value a home for a mortgage and I believe there is less stringent analysis done even though the appraisal is using more data points. I believe it is less stringent then the other methods at arriving at a projected sales price because out of these three methods you are least likely to get an immediate correction when there is an incorrect valuation. If anything the market forces tend toward optimistic valuations, which would leave you disappointed if you tried to sell and found out you could not receive the appraised value. There are many reasons for this dynamic, but I will not elaborate on my opinions as to why at this time. Since this is a blog I can just say that this is my opinion based on my experience and leave it at that.

Option 4:

Ask a Realtor for an expert opinion. A Realtor will take the information from the tax roles, a CMA and apply their personal experience which, if you have a good Realtor, will provide the best results at determining an expected sales price. A Realtor can also provide information on the time it would take to sell the home based on the price you want to receive. This is important before you list a house for sale because a house listed for sale without a paying tenant costs you money! The cost is not just your mortgage, but the lost revenue because you are not receiving rent. If your mortgage is only $1,000/month, but the rent you receive is $1,400/month, then it costs you $1,400/month just to have a vacant home listed for sale. A word of advice, since Realtors only get paid at the conclusion of a sales transaction, don't call every year and ask for their expert opinion based on an in-depth analysis for free. You can achieve an annual assessment using the other methods, but save this type of in depth analysis for when you really need it, don't burn your valued resources by asking repeatedly for free advice.

So, if you want to determine the value for your annual assessment of your net worth or you are considering refinancing then use option #1. If you have decided that you are going to refinance for some reason, then option #3 is a requirement. If you think you want to sell your home, then start with option, #1, then go to option #2 then finish with option #4 before making a final decision.

If you know you must sell the home, then go immediately to option #4 - get your hands on a trusted Realtor and employ them as your agent. As your agent you should divulge all your issues and motivations and ask them to help you get what you need. I hate to have to say this, but remind your Realtor of their obligation to watch out for your interests and keep your goals and motivations confidential - if you do not feel comfortable that your Realtor can do this for you then do not sign up with them to represent you.

I hope this helps. If you want more detailed information please email me directly and if I am not the best resource for your question I will put you in touch with the best person here at Prime Properties to assist you with your question.


1 comment:

Anonymous said...

Great blog...keep em coming!