How Much Is Your House Worth?

A house is worth whatever a buyer will pay. Despite its simplicity, there’s a good measure of truth to this answer. But it’s a little more complicated than that, in part because what buyers will pay is influenced by what lenders will lend, and because sometimes it’s necessary to determine the value of a house without selling the house.

A residential home appraisal is an attempt to put a dollar value on a house. Usually this is done either to obtain a loan or to determine the tax valuation. There are several ways to go about appraising a property, and there will likely be different outcomes based on who is doing the appraisal and for what purpose.

The tax assessor determines value by looking at comparable recent sales. A comparable house is a house of similar size, with similar amenities, in a similar neighborhood that has sold recently (usually within the past 6 to 12 months). However, tax valuations are frequently inaccurate and usually lag behind what the market is doing because property is reassessed infrequently. Assessors often rely on public records rather than a walk-through of the house, and they don’t put much value on things like high-end finishes, appealing architecture, being in a trendy neighborhood, or having an amazing view.

Appraisers chosen by lenders for the purpose of a home loan will also look at comparable recent sales to determine value. The weak point here is that although appraisers walk through the subject property, they don’t walk through the comparable houses. So, they must make an educated guess about how these houses compare based on what they can find online.

Also, lender appraisers are not home inspectors, so they will take a house at face value. If it looks on the surface like it’s in good condition, then it is in good condition and will be compared to other houses in good condition that have sold recently.

Real estate agents determine value by looking at comparable sales, and, like lender appraisers, they are not home inspectors. However, experienced agents who know a neighborhood well have often been inside many of the houses that have sold recently, which can help them to better gauge what a house will sell for.

Furthermore, agents spend a lot of time with buyers and get to know what buyers like and don’t like. Aesthetics make a big difference in sales, and agents are often better equipped to judge how aesthetics will affect value.

With all these different methods of determining value, how do you know what your house is really worth? Let’s look at an example.

An investor bought a Denver house from an estate in October 2010 for $97,000—nearly $20,000 less than the asking price of $115,000. The house was in terrible condition and had been vacant for more than ten years. The garage was falling down. The water had been turned off. According to the tax records, the house was worth $209,000.

Just four months later, the same house, in the same condition, sold again to another investor, this time for $122,500. According to the tax records, it was still worth $209,000. Why the change in price? Because the second investor saw value that the first did not and was willing to pay more. Since both the first and second sales were cash deals, the house really was worth what a buyer would pay. (No bank would have loaned money on the house because it was in such poor condition, so as far as the bank was concerned, the house had zero value.)

In May 2011, after just $15,000 worth of fix-up work, a real estate agent estimated the investor’s house would sell for $175,000. Meanwhile, the tax assessor, based on information about the house’s condition before the fix-up work, reassessed the property at $141,800.

What will the house be worth when it sells? Whatever a cash buyer is willing to pay, or what a traditional buyer is willing to pay and a bank is willing to lend.

So what’s your house worth? Taking into account assessments, appraisals and comparable sales, along with a host of other considerations like aesthetics, amenities and the like, there’s no easy answer. Your best bet is to talk with an agent who understands these various factors, how they’re interrelated and their cumulative impact on the value of your home.