It’s no secret that home values have dropped dramatically in virtually every
market in the United States over the last few years. Several states have
seen frightening price adjustments downward. Florida, California, Nevada and
Arizona lead the nation with the decline of residential home values. And
while these states appear to have slowed their declines, at least
temporarily, other states are accelerating theirs.
So if prices are dropping how can you tell how much your house is worth?
These days one can’t always depend upon time tested methods for determining
the price of any residential property. But just so you are aware of how the
typical home has been valued in the past we’ll look at the methodology for
pricing a home.
The replacement value of your home is primarily determined by the cost that
would be incurred to rebuild the
structure as it is from the ground up. The replacement value would include
all of the building materials necessary to return your home to its present
condition in the event it had to be rebuilt. This method of determining the
value of a residential property is most often used by insurance companies.
It’s also one of several criteria for value used by real estate appraisers
in arriving at the value of a house.
Real Estate Owned or REO
Never before have we seen so many foreclosures in the United States as we
are seeing today. And there seems to be no end in sight. Many lenders are
carrying enormous real estate owned (REO) inventories. These are properties
a lender has repossessed in foreclosure. Since banks are not in the business
of owning or maintaining real estate they need to sell these properties as
quickly as possible. Gone are the days when a lender wanting to unload a
foreclosed home could simply list the home for sale with a Realtor and sell
Comparable Sales or Comps
These days lenders need to market the property speedily and at the lowest
possible cost. In the past a bank owned property would be sold like any
other. The bank would depend upon a professional appraisal as the determiner
of the home’s value. But in today’s anxiety-ridden marketplace an appraisal
does nothing more than add additional expense to the sale of a property that
has already fallen dramatically in price. So to determine the value of a
home the lender now often uses the comparable sale method of determining the
value of a home.
This is a relatively simple way to determine a home’s value. The bank
contracts with a local licensed broker to deliver the sales figures on
similar homes to the one in question. These are all properties that have
closed within a certain period of time. In the past a qualified appraiser
would deliver ‘comps’ or comparable prices based on the similarity of homes
sold but today that duty has fallen largely to real estate brokers.
For example, if a bank ordered comps on a 1600 square foot ranch style home
in Palm Springs sitting on a typical city lot the broker would search for
homes that have sold recently meeting the same criteria. There are also
other factors that would be taken into consideration such as the various
amenities or lack thereof, which might add or take away from the final
value, but this is the primary principle of the comparable sales method.
An appraisal incorporates all of the above methods in determining the home
value. An appraiser might offer an extensive opinion of valuation based on
bids from builders based on the cost of construction per square foot. And he
would surely include current comps as well.
Determining the value of a home these days, as always, is probably more an
art than a science. And it would seem that with the market going through its
various convulsions of the past few years there’s been just a little bit of
witchcraft thrown in to boot.