What’s Your Home Worth? Understanding the Valuation Process

This post is to help you, as a prospective or active home seller, to independently achieve a better understanding of what your home is worth.

The largest investment most people make is their home. That makes selling a home — whether a single-family residence, duplex, or condominium — the single largest, most complex transaction you will likely ever undertake. It involves new terms and concepts, financial acumen, and larger figures than normally dealt with. Which is why most sellers don’t venture alone into selling their home. Instead, they enlist the help of an experienced real estate professional.

SETTING THE PRICE

Establishing the right asking price is critical to the home selling process. Setting the price at which to sell your home is not a simple formula, nor totally mathematical. Many elements factor into the decision. A calculated home value is not necessarily what you believe your home is worth. Recognizing this helps avoid overpricing, a major factor that leaves homes languishing or unsold.

Familiarity with the real estate terms market value, appraisal value, and assessed value can save disappointment and frustration, and allow you as the seller to meaningfully engage in setting a home’s listing price.

MARKET VALUE

The most used definition of market value is “the most probable price a property should bring in a competitive, open market, under conditions requisite to a fair sale”. Essentially, this is a pre-negotiation opinion of what a house should bring in its local market, i.e., its geographical area, generally an area such as a suburb or neighbourhood.

APPRAISAL VALUE

Appraisal value is an evaluation of a property’s worth at a given point in time that is performed by a professional appraiser. Appraised value is a crucial factor in loan underwriting. This is because it determines how much money may be borrowed and under what terms.

For example, the Loan-to Value (LTV) ratio is based on the appraised value. Buyers with a down payment of at least 5% of the purchase price but less than 20% must be backed by mortgage insurance. This protects the lender in the event that the home buyer defaults. These loans are known as “high LTV” or “high ratio” mortgages.

In situations in which the buyer has 20% or more for a down payment, the lender or borrower could obtain “low-ratio” insurance that covers 100% of the loan in the event of a default.

Mortgage insurance is backed by the Canadian government through the Canada Mortgage and Housing Corporation (CMHC). (Globe and Mail, 2016; updated 2017)

ASSESSED VALUE

Assessed value is the amount the local or provincial government has designated for a specific property, and frequently differs from market value or appraisal value. This assessed value is used as the basis of property tax and when a property tax is levied. The assessed value of real property is not necessarily equal to the property’s market value.

So then, the burning question…

WHAT IS YOUR HOME WORTH?

The first step in selling your home is knowing the difference between value, worth, and price. Let’s examine the determining factors at work. Understanding those factors allows them to be leveraged. There are several ways a home’s value is derived.

ONLINE HOME VALUATION

Online tools will provide you with a very basic estimate of your home’s current value based on recent comparable home sales in your area using a comprehensive database. Note that the assessment is based on available data with no guarantee of accuracy, and often uses an algorithm that simply averages comparable sales in the geographic area. These tools might be quick and easy, but they don’t take into consideration factors like location, current local trends, and the condition of the property. Be aware that the prices arrived upon might even be highly inaccurate. 

That said, it’s a great place to start, especially if you’re just curious. You can enter your address into the Remax Automated Valuation Model (AVM) to get started.

PROFESSIONAL APPRAISAL

Nothing determines the sale price of a piece of real estate but the price at which it actually sells. Houses are not same-priced identical cans of tuna on the grocery store shelf or shares of stock valued and traded every day on the stock exchange.

Real estate appraisal (“property valuation”) is the process of developing a perspective of value for real property. This is the market value — i.e., what a willing, reasonable buyer would pay for the property to a willing, reasonable seller. Real estate transactions generally require assessments because they happen infrequently, and every real property is unique in features and characteristics.

An appraisal helps in various decision points. The seller can use the appraisal as a basis for pricing. The buyer can use it as a gauge on which to base an offer. Lenders use appraisals to know how much money to credit to their borrowers.

The important factors in a house appraisal are:

• Dwelling type (e.g., one-storey, two-storey, split-level, factory-built)
• Features (including design) — materials used and the kind of structure present and how they were built
• Improvements made
• Comparable sales
• Location — type of neighbourhood, zoning areas, proximity to other establishments
• Age of property
• Size
• Depreciation

Condition, of course, is a crucial factor in valuation. Location is also a factor. However, as property cannot change location, upgrades or improvements to a residential property often can enhance its value.

A professional appraiser should be a qualified, disinterested specialist in real estate appraisals, with expertise in your region. Their job is to determine an estimated value by inspecting the property, reviewing the initial purchase price, and weighing it against recent sales with the same purchase price.

COMPARATIVE MARKET ANALYSIS BY A REAL ESTATE PROFESSIONAL

This type of home valuation, the Comparative Market Analysis (CMA), is more detailed and helpful than automated online offerings. It provides detailed information on each house sold in your area over the last six months, along with the final sale price. It also includes the specifics of all the houses for sale in your area, including the asking price. These homes are your competition. The real estate professional will also answer any questions, and help you price your home realistically.

Along with an understanding of how the worth of a home is determined, the current market must be considered. By utilizing a professional real estate agent, you can rely on proven expertise to market your home at the best listing price.

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If you’re serious about putting your home on the market – either right now or within the next 6 months – a CMA will provide you with all the information you’ve just read about in this post. This will help you choose an appropriate selling price based on the current market conditions.