What Is Market Value?

What decides a home’s value? Why do two nearly identical homes in two close-by towns have a $300,000 difference in their selling prices? Why did the house across the street linger on the market with price reductions while the one on the next block sold in three days over the asking price?

There are a lot of reasons why.

The best definition of a property’s value is what a ready, willing and able buyer will pay for the home. In that sense, value is a moving target. Maybe the buyer willing to pay $1.5 million for a certain house is unaware it is for sale, out of town or just bought a different house, leaving only buyers willing to pay $1.45 million for that home. Alternatively, multiple buyers may be anxious to pay $1.5 million and, when they compete to do so, drive the price up to $1.525 million.

So, valuing a property is an art rather than a science. When determining value, both buyers and real estate agents try to find similar properties that are either on the market or recently sold to get a sense of pricing. Appraisers inspect the home and search property records to establish value, and some lenders are using automated property valuation models to determine if a property’s sales price is a reasonable measure of value.

After doing the preliminary research, adjustments need to be made to come up with a more accurate value. “Location, location, location” is one of the factors that appraisers weigh when coming to their conclusion. Location can mean an entire region, town, neighborhood or even an individual plot of land. One location might support a high price because it has spectacular views, next to a golf course, or has lakefront access. Appraisers also pay close attention to the economy and employment opportunities, the quality of local schools and the proximity to shopping, entertainment and recreation centers.

It is not uncommon to find hundreds of thousands of dollars difference between the median price of a house in a town that has a highly rated school system and the median price in the next town over. There can even be differences within a district where one school is better than the others.

Home size is definitely a factor in value and is more objective than many of the others. Price per square foot can be a useful tool to compare prices. But even with that, some square footages are worth more than others. For example, permitted square footage in the basement behind the garage is not worth as much as square footage upstairs in the main living area. The reason being that the space is already there, someone just needs to go get a permit to develop it. Lot size can also increase value, especially if there is a possibility of doing a lot split or developing it, but again, a lot of buyers might not want to pay for the landscaping maintenance.

Age and condition, which may go hand-in-hand, play roles in value as well. Newer homes often appraise at a higher value because their systems and appliances are generally in good condition, lowering potential repair and replacement costs. Older homes are more likely to have some deferred maintenance or require upgrades to utilize new technologies. However, an argument can also be made that older homes are built better utilizing more handcrafted materials and can never be replaced. Those built in the 19th or early 20th centuries that are typical of their era – Victorians in particular – are increasingly rare and sell for unusually high prices. And the same goes for any structures that have any historical significance.

In recent years, buyers have been willing to pay a premium for energy efficiency; new windows seem to be the most important factor. While still new, “smart home” features also appear to be increasing value when they are in place.

Then there are the other intangibles. Factors that give a home value that may reflect current tastes versus traditional uses. Lately the trend has been going toward a great room instead of a more formal living room. Open floor plans are in, whereas people preferred more of an enclosed kitchen before. Finishes can also make a difference in value. Hardwood floors are generally valued more than carpet, solid countertops outsell tile, conventional décor fares better than exotic schemes.

In this area, tenant-occupied homes sell at a lower price than vacant homes because of rent control and the cost in recovering possession. Unless the tenant moves out voluntarily, the owner will have to do an eviction or a buyout, incurring an unknown expense.

Thus, valuing a home is complicated. It is more an art than a science. To get an accurate analysis, one must factor in many tangible and intangible characteristics before arriving at a realistic value.

John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email johnlee@isellsf.com.