What's A House Worth?

What is a house worth? To begin with, it sure doesn't have anything to do with how much you have spent buying it or improving it - at least not in any direct sense. People often do $30,000 "improvements" that add just $20,000 in value to a home. Other times a smart $4,000 improvement can add $15,000 to the value of a home.

To figure the value when it is time to sell a home, ignore what you have into it or what your cousin tells you it should sell for. Underprice it, and you'll lose potential profit. Overprice it and you could sit on it for months or years, losing money to holding costs the whole time. Use the techniques that appraisers use, and you'll know what the house is worth to the only people that matter: buyers.

What's A House Worth - Using Market Analysis

There are two basic methods used to put a price on a house, if we don't include the usual make-a-guess technique, or appraisal based on capitalization, which is used for income properties. Replacement cost analysis asks "What would it cost to buy this land and put this house on it? But it can be difficult to say what the land is worth in some places where no empty lots are for sale, and after figuring the cost of new construction, you have to allow for depreciation - again a tough call. That's why this is used as a secondary method, and for unique homes that can't be compared easily with others.

The most common method used by real estate appraisers (for houses) is doing a market analysis using comparable sales. Essentially you look at three or more nearby homes that have sold, to see what your house is worth. Appraisers have all sorts of rules about this, but the idea is generally to consider homes close to yours (same neighborhood or within a half-mile), that have sold in the last six months (or the last year if necessary). Usually this information is available county records, or from a real estate agent.

Start with the selling price of each of your "comparables," or sold homes. Suppose your house has a second bathroom, and comparable number one doesn't. You estimate the value of the bathroom, and add that to the sales price of the comparable. If the other home has a blacktop driveway, and yours is gravel, estimate the added value of an asphalt drive and subtract that from the selling price of the other home.

This may seem counter-intuitive at first, but what you are doing is rectifying differences, to see what the other houses would have sold for if they were like yours. If a home down the street sold for $140,000, and a second bathroom is worth $15,000 (get a real estate agent to help with these estimates), you add $15,000 for the bathroom it doesn't have. Subtract $4,000 for the paved driveway it does have, and you get a comparable sales price of $151,000.

This gives you an estimate of what it would have sold for if it was like your house. Remember: add for the things it doesn't have that your house does, and subtract for the things it has that your house doesn't. This will make sense once you try it.

All appraisal is an inexact science. You might only find comparable sales from over a year ago, for example, so you have to estimate appreciation in the area (and add it to the sales price of the comparable home). If seller financing was involved, you have to decide how this affected the price a house sold for (often it means a higher-than-normal price). For single family homes - despite its flaws - this is the most accurate way to determine what a house is worth.

Flipping A House | What's A House Worth?