Home owners are usually quite curious to find out what the value of their home is really worth is in today’s market. When we talk about value, we aren’t talking about how much it costs to build or buy or how much the renovations cost, but rather what will the market of potential buyers in today’s market feel it is worth.
There are a number of common misconceptions that many home owners are under when deciding what their home is really worth. Read on to see how real estate brokers determine how much your home is really worth.
Many of my clients when I arrive to evaluate their home tell me they already know what its worth, as they saw the neighbour’s house was for sale for some price, and their home is better or worse and therefore their home is worth more or less than their neighbour’s home (usually they’ve determined its more). Of course when I ask if they know what it actually sold for, versus what the neighbor was asking for, sometimes I’m met with blank stares. So…
Basing value on the asking price of comparative homes will not at all help you determine the value of your home. While this may be one very basic way of looking at it, and there area many different more accurate methods to evaluate value of residential real estate.
Some clients have called their bank and had them send over an evaluator (or appraiser) to determine the value of their home. While this is useful for the bank to determine how much they can lend against the home, it doesn’t always reflect the market value of the home – in other words what a buyer thinks its worth.
So I usually advise my clients to take the bank’s appraisal with a grain of salt.
I have personally seen evaluations by some banks that are 25% to 50% more than what any reasonable buyer would ever pay for a similar home. So I usually advise my clients to take the bank’s appraisal with a grain of salt. Use it help in determining borrowing capacity, but don’t always expect you will get that price in the market.
Some home owners will look at the municipal assessment on their tax bill and determine that by some factor, their home must be worth X times that assessment. Again, not the most accurate method of determining value as even in the same neighbourhood, the municipal evaluation will differ greatly between very similar homes, and the fact is that most city evaluators have never visited the inside of the majority of homes sold.
I have a client who is a general contractor with a gorgeous renovated home, yet whenever I come by to visit him, the front of the home looks dilapidated and run down, stairs cracking and driveway in need of repair. I know he can fix it easily so I ask him why he doesn’t. He explains to me that its his way of keeping his property taxes down.
As cities require more tax revenue, they will increase the municipal evaluations of ALL homes in an area regardless of the conditions, sizes, or renovations done on a property. In some markets the city raises the municipal evaluation to increase their tax revenues, while home prices may have gone down during the same period. One of the most common mistakes I see buyers make is use municipal evaluation as an accurate way of determining market value.
In some markets the city raises the municipal evaluation to increase their tax revenues, while home prices may have gone down during the same period.
There are also cost methods, which are used in specific circumstances for insurance purposes for instance, based on what it would cost to build or re-build the existing home, or the costs of materials that went into the home. While this may produce a value, it is not the value that the market will necessarily pay for a home.
The most common used by real estate brokers in determining value is not based on what the bank thinks its worth, costs to build, costs of materials, the city’s evaluation, or even the asking price of similar homes. We use a sales comparison (or market) approach.
This method usually takes the form of a comparative market analysis or CMA. This method is generally accepted as the most reliable method of determining what residential properties will sell for in the current market.
In preparing a CMA on your home, a good real estate broker will analyze several homes from the same neighbourhood (that have recently sold) of similar building type, size, bedrooms, bathrooms, garages, yard size and year of construction to your home. The broker will then match feature by feature these homes to your home, adjusting the value of each of the comparative homes in price so that they match the same feature set as your home.
For example a finished basement may be worth say $25,000 in the eyes of many buyers, and while the comparative home sold for say $300,000 without a finished basement, and your basement is finished, well the broker would adjust the sale price of the comparative home to increase its sale price by $25,000 in analyzing its value. In other words had the comparative home had a finished basement it may have sold at $325,000 instead of $300,000.
Generally its not what you spent that determines its value, its what the buyer is willing to spend to buy it.
Likewise major features such as lot size, number of bedrooms, number of bathrooms, garages, heating system, amenities and renovations would also have an impact on the market value of your home in the eyes of potential buyers. Many sellers are surprised when I tell them that the $30,000 they spent for their in-ground pool added $0 in value to their home. Generally its not what you spent that determines its value, its what the buyer is willing to spend to buy it.
As broker we work first-hand with buyers every day and we have the best experience determining what buyers put value on in a house. What surprises many home owners is that sometimes what many buyers put value on is completely different from what the homeowner values in their home.
Our goal is to give the home owner an objective and informed opinion on the market value of their home in order to determine the best sale price for their home to ensure it will sell for the highest possible price within a reasonable period time. The best method to do that for the purpose of selling the home eventually, is a comparative market analysis.
If you are considering a move or are just curious to find out what your home is worth in today’s market, for an accurate evaluation of the true market value of your home, I encourage you to contact me to schedule an appointment to have me visit and evaluate your home.
An earlier version of this article I wrote appeared in the Montreal Times newspaper.
I'm Andrew Mitchell, Chartered Real Estate Broker and Owner of Vistacor Realty Group. I help buyers, sellers and investors in the West Island, Montreal and Vaudreuil-Soulanges areas buy and sell homes. My goal is to provide you with useful, straight-forward insights and relevant real estate market updates. Contact me with any questions. Follow me on twitter here.
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