How Do You Determine Your House's Value?

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Last updated on February 5, 2019 Comments: 10

Yesterday, I pointed out that the house you live in is an essential part of your net worth calculation. But determining the value of your house, especially if it’s the house you live in and not something you track as an investment, can be tricky.

It’s easy to determine the value of your mortgage to include that in your net worth calculation. Just look at the latest statement from the lender. The statement will highlight your remaining balance, and it’s a number you can’t escape if you do in fact, as you should, look at your statement every month.

The house can be trickier to value. But if you include your mortgage in your net worth calculation, you should also include some value for your house. And it should be a value that makes sense. There are at least three ways to determine your home’s value for the purposes of your net worth calculation.

1. The value of your home is the price you paid.

When you purchased your house, you and the seller agreed upon a value. You then paid the seller that much money, whether you borrowed the money or not, and paid additional fees to complete the purchase. It’s not wrong to consider the purchase price the value of your house for your net worth calculation purposes. No one could say that your figure would be wrong if you use this approach. After all, this was the last market-confirmed value, and there won’t be another market-confirmed value until you sell the house.

This is a problem if you’ve lived in this house for a substantial amount of time. Your community may be more desirable than it was when you moved in, or it may be less desirable. Your neighbors in similar houses might have sold their homes for more money in the intervening years, and the sales price of “comparables” may effect the potential sales price of your own home. You may have made improvements to your home or you may have let it fall apart. All of these factors can change the value of your home, and you can’t be sure until you put it on the market and receive at least one offer.

The big benefit of using your house’s purchase price as the value of your house in all future net worth reports is that it ensures your net worth progress reflects mostly the financial decisions you make on a day-to-day basis. That would allow your net worth progress to present a better picture of your behavior with money, but it wouldn’t really represent your true net worth at any one time.

If however, you own your house for a sufficiently long time, there’s a great chance the value of your home will be so far off from the purchase price that your net worth with a number in old dollars is relatively meaningless. An interesting remedy would be to use your purchase price initially, and then adjust your home’s value on your balance sheet once a year based on the rate of inflation. This will allow you to continue using the house’s purchase price, but it was always be in “today’s dollars,” just like your mortgage and the rest of your balance sheet.

2. The value of your home is defined by appraisal or competitive market analysis.

In order to pay property tax, your local government depends on appraisals. Appraisals provide a way for the government to look at your land, your home, and any changes to either since the purchase of your home to determine the amount of your tax bill. Appraisals also come into play when you’re going through the process of selling your home. When you pay tax, you want the appraisal to be low, while when you’re selling, you want the appraisal to be high. And if an appraisal isn’t inline with the owner’s expectations, the owner can challenge it.

Using the latest appraisal in your net worth statement offers a more timely valuation, but it may not be a valuation you agree with. It may not be a valuation that has any relevance to the amount of money a buyer would be willing to pay, either. It is the result of someone’s opinion — a professional’s opinion — but a real estate agent familiar with your home and your neighborhood may be better professional to offer such a valuation. And if you ask a professional who doesn’t have any reason to exaggerate, you can probably get a relatively accurate estimate.

A real estate agent might be willing to do a competitive market analysis for your property if you appear to be intending to use that agent to represent you in a sale. And certainly, an agent who is willing to do this work for you will feel he or she is in a good position after doing a significant amount of work for you to choose that agent as your broker.

A competitive market analysis may be more accurate than an appraisal, but neither of these would you do every month to keep your net worth calculation “accurate,” or to follow the potential of a sale price that might change on a month-to-month basis.

3. The value of your home is provided by Zillow.

Anyone who has shopped for a house in the last few years is likely familiar with Zillow. I’ve only just begun to look at houses — and I’ve paused those efforts during my latest round of travel — and I’ve been using Zillow to plan most of the visits. Zillow’s estimate — or Zestimate — for one property I was interested in was a good $100,000 or more higher than the seller’s asking price.

So how does Zillow come up with their estimates for each property? Zillow uses public data about recent sales and uses a calculation — a proprietary formula — that takes factors about the home and its neighborhood into account. A few real estate agents I’ve talked to don’t like Zillow’s estimates. It seems to make their job more difficult, and they believe it could lead buyers or sellers to make bad decisions. I think it’s important to remember this value is just an estimate, but it is based on data, and that makes it appealing to people wishing to track their net worth (as well as to people house shopping).

A publicly-recorded sale of one house in a neighborhood can send Zestimates in one direction or another without much warning, even if that house bears little resemblance to one’s own. And that’s one of the possible reasons house values are fluctuating month to month on the net worth report submissions from Naked With Cash. Zillow offers verifiable data to support a valuation on a balance sheet, and it gives someone the comfort level of not having to guess the value of their property on a day-to-day or month-to-month basis.

The question is whether Zestimates are correlated to actual sales prices. And there have been a few analyses completed outside of Zillow to determine if there is a trend of Zestimates to be higher or lower than realized prices, but every area seems to be different.

What is your method for including a value for your house on your balance sheet? I have not owned a house in the past, and I don’t own one now, so I’ve had no reason to decide on a method for myself. I’m curious how other people think about the value of their house while they own in.

Article comments

Tom says:

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Anonymous says:

Insurance often will only pay “The cost of replacement”. This would be another good metric to use in determining the value to account for in terms of net worth.

Anonymous says:

I like your first point about the value of your home being the price you paid. Like you said, this was the last confirmed market value. I think that people overlook this when it comes to home. However, basic economic principals tell us that value is dictated by what someone is willing to pay for something, not necessarily what the seller thinks it is worth.

Anonymous says:

I know what I paid for my house and I know what they are selling for. I don’t like to think of my house as an investment personally. This is where we live and not where I’m making money. So many people are begging and hoping their home goes up in value, but I value what happens in my house. I’ve had too many neighbors jump in and hope to turn around their house and make a profit only to lose it. When we bought in 2008 we felt good, then the market crashed and we worried we would never get ahead, then the last two years houses have skyrocketed in our area. Hard to predict what will happen since there has been a $100,000 swing in the last couple of years. We’re just happy either way. I value my home at what I bought it for and what I have put in to it with upgrades on the yard and other projects….not for what they are selling for.

Anonymous says:

I use the Zillow estimate for net worth tracking, even though the methodology behind it is not perfect. The reasoning: more and more buyers are treating the Zestimate as the “real” value of homes. Therefore, the Zestimate is a sort of self-fulfilling prophecy: the more that buyers believe in it and thus make offers based upon it, the more it actually becomes the market value of your home.

Anonymous says:

I use my Tax Assessment. It is also a result of “market-based” data but seems to be a bit conservative during periods of rapid growth. Also, as I mentioned in my comment yesterday, I treat that growth as an unrealized gain which is subject to associated risk.
In my neighborhood Zillow presents somewhat low valuations because there were several foreclosure sales. These sales were the result of two highly leveraged rental property owners who suffered badly during the housing “crisis”. There is a substantial gap between the returns on the foreclosed-on property and the normally well-maintained family-owned sales that is only apparent if you dig deeper into the data.

Anonymous says:

I would say the current market value of your house is what a buyer is willing to pay you for it: without a buyer, you have nothing but an estimated valuation based on previous sales in the area. The price you paid originally for the property is largely immaterial because the market may have moved up (or down) since then, and you may have made improvements (or let the place fall apart).

Luke Landes says:

So how do you determine the value of your house for the purposes of your net worth? I like Money Beagle’s approach, looking at a variety of factors. It’s all just an estimation until (and if) you seek and receive a real offer to purchase — not exactly an efficient market.

Anonymous says:

Hi Luke. To be honest, what the current market value of your home is (whether it has gone up or gone down in value since you purchased it) is larely irrelevant unless you’re cashing in and leaving the area or the country: home prices are relative, so when you sell one home (and rejoice that it has gone up so much in value since you purchased it), you’ll find you’re no better off because your NEW home will also have gone up by a similar percentage (most people trade UP, not DOWN). We all need a place to live, so I’m not sure a home is a suitable thing to add to your net worth at all.

Anonymous says:

I use a weighted average taking into account what the assessed value is, what Zillow provides, and an estimate based on recent sales and prices within the neighborhood.

For purposes of net worth, I write down a percentage that I would expect to pay in the event I sold the house for the realtor fees and what not. I feel it’s important to get an accurate representation of what you would end up with after selling your house, and just taking the value misses too much.