If you’re looking to buy or sell a home, you’ve probably heard of home valuations. A home valuation is an estimation of the current market value of a home based on factors such as the size, condition, location, and amenities in and around the house. Home valuations are a crucial part of the real estate process, as they give buyers and sellers a good indication of what their property is worth. But have you ever wondered how realtors and appraisers do the math to create an accurate valuation? Learning about the different approaches to home valuations can help you better understand how much a home is worth in the marketplace.
What Is a Home Valuation?
A home valuation, also known as a comparative market analysis (CMA), is a report that estimates a home’s worth based on factors such as recent sale prices, local housing trends, and current market conditions. Real estate agents typically use them to help buyers and sellers make decisions during home buying or selling.
How Realtors Come Up With Valuation Estimates
When determining home valuations, real estate agents use several strategies to arrive at an accurate estimation. Here are some of the most commonly used techniques used to come up with valuation estimates:
Sales Comparison Approach
The sales comparison approach is based on the principle of substitution: buyers will substitute a less expensive property for a more expensive one. To use this method, realtors compare the subject property to similar properties recently sold and adjust values based on characteristics that may differentiate the properties. These characteristics include size, condition, location, amenities, and more. Realtors assess these factors and use their expertise to determine if any one property is worth more or less than another.
Cost Approach
The cost approach technique estimates the cost of replacing the structure with a similar new one minus any physical depreciation.
This approach considers land value and the cost of materials and labor needed to rebuild the structure, with adjustments made for local market conditions and trends. The cost approach can be constructive when estimating the value of older or unique properties that lack similar sales comparisons in the area.
Income Capitalization Approach
The income capitalization approach is used by realtors when estimating the value of income-producing properties, such as rental homes or commercial buildings. This method uses a rate of return to calculate the value by dividing the net operating income (NOI) by a designated rate of return.
The NOI includes all rental income after expenses such as taxes and insurance, while the rate of return depends on factors like economic conditions and local market trends. Because the income capitalization approach doesn’t consider depreciation or appreciation, it can be less accurate than other methods but still useful in certain situations.
What Do Realtors Consider When Evaluating Home Valuations?
In addition to using these strategies, real estate agents often consider other factors when evaluating home valuations, including:
Square footage
Property age
Condition of interior and exterior of the property
Upgrades or renovations
Recent sales prices of similar homes in the area
Amenities offered at the property, including pool, views, etc.
Local housing market trends
The general condition of the local market
In addition to considering these factors, many real estate agents also factor emotions into their evaluation process by considering things like good vibes from a positive experience during showings, which may affect a buyer’s decision-making process when considering making an offer on a property. Understanding how realtors come up with valuation estimates can help you better prepare for buying or selling your next home.
How Accurate Are Home Valuations?
Home valuations are generally considered accurate estimations of a property’s market value. Still, they can vary from one realtor or appraiser to another, so having more than one professional review your property for comparison is essential. Additionally, estimates can change drastically depending on current market conditions, so staying up-to-date on housing trends in your area is crucial for a more accurate estimate.
Essential steps to determine a home’s value
Here are six ways to get an accurate estimate on your house:
Online Price Estimator
If you’re looking for a quick, easy, and free real estate price estimate, several online services can provide an estimate in minutes. These estimates are based on data gathered from public records, so they’re not as comprehensive as a professional appraisal. However, they can give you an idea of what similar homes in the area have recently sold for.
Get a Comparable Market Analysis (CMA)
Another way to obtain a real estate price estimate is to hire a real estate agent to perform a “comparable market analysis” (CMA). This is essentially an in-depth market analysis of your home based on current sales data for similar homes in your area. The CMA will consider various factors such as size, age, condition, and amenities that may affect the resale value of your home. The report will also provide an estimated asking price for your property based on the data gathered.
Appraisal From a Professional
The most reliable way to obtain an accurate estimate for your home is to hire a certified appraiser. Most lenders require a full appraisal before they approve a mortgage loan. A professional appraisal will provide a comprehensive report detailing the value of your home relative to the current real estate market. The appraiser will assess the condition and quality of your home and include an estimate of any repairs or improvements that may need to be made before it can be sold.
Research Recent Home Sales
Suppose you’re looking for an estimate of what buyers pay for similar properties in your area. In that case, researching recent home sales can provide valuable insight into your home’s estimated value. By considering the location, size, amenities, condition, and other characteristics of recently sold homes, you can better understand what buyers are willing to pay for similar properties in your area.
Conclusion
Home valuations are integral to understanding your property's worth before entering into any financial transaction, such as buying or selling your house. By using approaches like comparable market analysis (CMA), automated valuation models (AVMs), and cost approach appraisals, realtors and appraisers can come up with an accurate estimation of what your house is worth in today’s marketplace, which can help you make informed decisions throughout the home buying/selling process. Contact for more information.
