Determining Market Value Of Your Property

“Price is what you pay. Value is what you get.” – Warren Buffett

The value of your property depends on stakeholder risk.

For a property seller, the short-term risk is pricing too high and not attracting someone willing to pay market value, while the long-term risk is accepting an offer well below what the market would bear.

As a buyer, the short-term risk is affordability and maintainability while the long-term fear is equity accumulation – will its market value increase over time to secure lines of credit, establish a retirement nest-egg, finance a larger home or acquire a second property?

For the Realtor, their short-term risk is pricing too high and losing their investment in marketing the property because the buyer pulled the listing. The long-term risk is allowing the property to sell under value and losing out on both commission dollars and high-value referrals from the seller.

As a lender, the short-term risk is procedural compliance and the long-term fear is the cost of administrating arrears as well as liquidating the asset at a profit should the property be repossessed.

There’s also a fourth stakeholder which is the government body responsible for valuing the property for the purposes of taxation.  The short-term fear is incorrectly valuing the property and having to administer complaints and the domino effect of re-assessments and re-valuations on similar ones. The long-term fear, of course, is undermining the ability of politicians to maximize the top line of their operating budgets.

So, there are tremendous incentives for everyone involved to establish a realistic value of the property so that financial decisions can be made based on accurate, timely and reliable data – all generated from a combination of formal and informal practices that will justify their actions now and in the future.

Formal valuation (think “appraisal”) practices are developed and policed by a government or industry regulatory body whose purpose is to establish a fair, equitable and transparent system of standards and practices that can be measured, audited and ultimately justified in a court of law should anyone question the legitimacy of the end number and/or how it was calculated.

How Value Is Determined

As a broad stroke statement, your property’s value is generally assessed along 6 major non-economic factors that probably determine upwards of 80-90% of its value:

  1. Location;
  2. Lot dimensions;
  3. Living area;
  4. Amenities & features such as number of bathrooms, fireplaces, garages, pools, water frontage, etc;
  5. Age of the property including consideration for major renovations and additions; and
  6. Quality of construction

The other 10-20% is subjective and could be based on a checklist of “in-house” factors such as economic conditions, projected future development in the area, and other in-the-moment situations (think of the effect on your home’s value if the house next door was still smoldering from a fire the night before).

The Tax Man’s assessed value is often out of alignment with what a Realtor or licensed appraiser would provide because the figures are averaged and indexed over time to minimize the costs associated with having to maintain current market values.

Now, on the topic of Realtor and licensed appraiser valuations, there’s a couple of things we need to understand.  First, both follow a similar approach to establishing the current market value of your home – especially in comparing your property to recent sales and those currently listed – but, the difference is that a licensed appraiser’s end product  is the only one that would be considered having enough evidentiary value in a court of law to protect a lender’s interest in the property.

Appraised Value

Licensed appraisers follow a systemized procedure for gathering and analyzing raw data to support their appraised value. Similar to how insurers rate your risk of illness or death, they work from industry-approved tables that measure how property amenities and features – such as building materials, lot size, location, and waterfront – affect the value of a property.  In theory, such a system of oversight and best practices should guarantee that three different licensed appraisers should return 3 similar evaluations but, there is a bit of subjective interpretation of the world at that moment which emphasizes the need for local experience and expertise in the selection of such a professional.

Your Realtor could be a licensed appraiser but, you need to know in writing whether the figure they are giving you is an opinion or a formal appraised value. The two might offer the same conclusion but, the one from the licensed appraiser is the one your lender will consider, first, when measuring their own opportunity and risk in lending you money.

Opinions Of Value and Comparative Market Evaluations (CMAs)

At best, a Realtor that is not a licensed appraiser can offer a written opinion of value. This definitely has merit since, as a licensed professional, they are expected to adhere to industry standards for producing a comparative market evaluation and calculating a property’s current market value. But, it may not meet the minimum requirements to secure financing against it.

You will pay for a licensed appraisal but the end product could outweigh such costs when it comes to securing your dream home or legitimizing the value of a damage claim on your property insurance.

The Gentrification Factor

Gentrification describes the revitalization of depressed or older neighborhoods by building homes styled with contemporary tastes in the area that attract middle-class buyers.   

One might see a 50’s era neighborhood of 800-1,200 square foot homes being torn down to build 2,500-5,000 square foot architectural wonders. Why? Because serviced lots in that area are cheap and the demand for big is big.  

These new developments complicate the valuation of your older property because one can’t measure a trend in their resale value, especially if it’s one of the first to be occupied – a gentrified property might cost $1M to build but when all the homes around it are only worth about $350,000 then what’s the fair market value of the new build beyond the cost of the land, materials and labor? And, if your property is suddenly valued for its serviced lot over its usefulness as a home then the building on the lot depreciates into a demolition cost in the mind of the buyer.

In such a situation then a licensed appraiser should be consulted to assist you in understanding the real value of your property at that particular moment in time, as well as forecasting value trends in the neighborhood for both the short term and long term.

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Should you be considering the sale of a property then the take away, here, is setting a price that is reflective of the value that a buyer will receive.

So, it’s important that you first understand how the market values your property and then positioning its features, benefits and advantages in away that the buyer sees a “gain” for themselves in paying your price based on that valuation.

And, when the time comes to determine the market value of your property – whether to sell or to refinance, then call The Mash Team, your trusted real estate advisers, to assist you.