How to calculate the Market Value of the Property Online?

How to calculate the Market Value of the Property Online?

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2. Work with a realtor

Realtors have their own techniques for determining a home’s value, and it can be helpful to get a second opinion to go along with the estimates from an online valuation tool. The process many realtors use to estimate a home’s value is called a Comparative Market Analysis (CMA).

A CMA includes information about comparable homes (also known as “comps”) in your area. According to Nolo, a good CMA can tell you what homes similar to yours are selling for, how long it’s taking them to sell, and what homes sold for compared to their original list price.

When working up a CMA, realtors typically look for recently sold homes that are similar in:

  • Size
  • Location
  • Number of bedrooms/bathrooms
  • Style and view
  • Home type (e.g. single-family home, condo, townhome, etc.)
  • Recent sales price

In preparing a CMA, realtors often look at data from the local Multiple Listing Service (MLS). It’s a database of properties in a given area that are listed for sale or have a sale pending.

In your quest to determine your home’s value

In your quest to determine your home’s value, another tool you might come across is the Broker Price Opinion (BPO). In some states, you need a license to provide one, whereas you don’t for a CMA. The Appraisal Institute maintains information on state BPO laws.

BPOs are often briefer than a CMA and are more often used for short sale or foreclosure situations instead of for regular home sales. They are also slightly more likely to cost money vs. being free.

Keep in mind that a CMA or a BPO can still miss the mark on your home’s value because they may not take into account every feature of the property that affects value. That’s something you can address by following the next step in this guide.

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Benefits of Knowing Your Home’s Value

Knowing the value of a home can help homeowners plan their finances more accurately. 

If you bought a home for $200,000 and its true market value is now $350,000, your equity has likely increased. You can then use this equity to secure a home equity loan, which can be used to buy a second home, fund a renovation project or consolidate debt. Use the Discover Home Loans Loan Amount Calculator to see how much you can borrow with a home equity loan.

You can also use the new value of your home to calculate your cash-out refinancing options. With cash-out refinancing, you can rewrite your mortgage loan for a larger amount and take that amount in cash. Use the Discover Home Loans Cash-Out Refinance Calculator to input the current market value of your own and learn more about your options.

Roadblocks to Real Estate Valuation

Both of these real estate valuation methods seem relatively simple. However, in practice, determining the value of an income-generating property with these calculations is fairly complicated. First of all, it may be time-consuming and challenging to obtain the required information regarding all of the formula inputs, such as net operating income, the premiums included in the capitalization rate, and comparable sales data.

Secondly, these valuation models do not properly factor in possible major changes in the real estate market, such as a credit crisis or a real estate boom. As a result, further analysis must be conducted to forecast and factor in the possible impact of changing economic variables.

Because the property markets are less liquid and transparent than the stock market, sometimes it is difficult to obtain the necessary information to make a fully informed investment decision.

That said, due to the large capital investment typically required to purchase a large development, this complicated analysis can produce a large payoff if it leads to the discovery of an undervalued property (similar to equity investing). Thus, taking the time to research the required inputs is well worth the time and energy.

The consequences of valuing a home incorrectly

For buyers, the biggest risk in valuing a home incorrectly is overpaying. Other consequences include loosing financing after appraisal or not getting your offer accepted at all.

Overpaying

If you value a home too high, you may set yourself up to be underwater on your investment, especially if market conditions are volatile. Plus, the more you borrow, the more you have to repay!

Low appraisal

Even if you and the seller agree on a price, the appraiser’s valuation will determine the amount your lender will loan for the property. When you agree to pay too much, it can be hard to get financing. If the appraisal comes in too low, it’s possible you will have to come up with a larger down payment, or you risk the deal falling apart.

Missing the opportunity

There’s also some risk in valuing a home too low. If you miscalculate, the seller may not accept your low offer and you may have to move on to another home.

2. Gross rent multiplier approach

The Gross Rent Multiplier (GRM) functions as the ratio of the property’s market value over its annual gross rental income.

“This is really back-of-the-napkin math, to see if you even want to double-click on a property before you begin itemizing the costs,” says Sanchez. “It tells you whether a property is in the ballpark you’re interested in.”

How to calculate the gross rent multiplier

As an example, a home with a fair market value of $200,000 that rents for $24,000 a year will have a GRM of 8.3:

$200,000 / $24,000 = 8.3

The GRM could be used as an estimate of how long it would take an investor to pay off a property based on rent income alone. In the example above, it would take the investor 8.3 years.

An investor could use the GRM approach to compare two investment properties, such as a $200,000 home that collects $2,000 in rent and a $150,000 property that collects $1,200. As in the example above, the $200,000 home renting for $2,000 a month has a GRM of 8.3. The $150,000 home would have a GRM of 10.4 ($150,000 / $14,400).

All other things being equal, the gross rent multiplier approach might suggest that the $200,000 home would be a better investment, since it would take a shorter time to pay off.

The GRM doesn’t take into account any of the real expenses that come along with real estate ownership, such as property taxes or insurance premiums, which affect the investor’s actual income. To take those into account, investors can use the income approach.

5 ways to find out what your house is worth

2. Ask a real estate agent for a free comparative market analysis

  • Best for: Those who are selling or considering selling a home

Real estate agents typically offer a comparative market analysis (CMA) for free in hopes of winning your business if you’re selling your house. To complete the CMA, the agent pulls data about recent sales of comps in the area. They then draw on their knowledge of the neighborhood and any special characteristics of your property to estimate its value. A buyer’s agent may also provide this same service for any home you want to make an offer on.

“A good agent will have the tools necessary to drill down and find an accurate market value,” says Robert Krasow, a Realtor with Michael Saunders & Company in Sarasota, Florida. “An experienced professional follows the market, looks at home conditions and knows the neighborhood — all while making determinations using both data and their expertise.”

  • Pros: It’s a plus to have an expert identify comps, answer questions and give guidance.
  • Cons: Real estate agents may use different comps or have conflicting opinions of your home’s value. In addition, if there haven’t been many sales in the neighborhood or the comps are not that similar to your property, the estimate won’t be as accurate.

3. Check your county or municipal auditor’s website

  • Best for: Those who want to understand their home’s value from a tax perspective

County auditors periodically assess the value of residential properties for property tax purposes, and this information is searchable online. You can look up the assessed value of your house to see if it has appreciated, or compare the figures with other homes for sale.

  • Pros: This objective data is easily accessible and provides another point of comparison.
  • Cons: This estimate is for the taxable value of your home and may not reflect some of the market factors that affect the sales price, such as time of year, competitiveness or curb appeal. In some localities, assessed values may be far off from market values, and it can take some research to find them.

4. Identify trends with the FHFA House Price Index calculator

  • Best for: Those who want to understand property price trends in their area over the time they’ve owned their home or another period

The Federal Housing Finance Agency’s House Price Index (HPI) calculator offers yet another take on home value. The tool analyzes historical mortgage data to project what homes in your state or metropolitan area are likely to be worth based on the rate of appreciation of all homes in the area over a given period.

  • Pros: The calculator draws on data from tens of millions of home sales and offers insights about broad house price fluctuations, so homeowners can compare the relative affordability of neighborhoods over a period of time.
  • Cons: This calculator doesn’t estimate the market value of a particular house. Instead, it offers a look at home price appreciation or depreciation over time. While this will give you a general idea of the local market, it won’t drill down into the specifics of your property.

5. Hire a professional appraiser

  • Best for: Those who want the most professional home value estimate, and may want to use the data as they consult with a mortgage lender

Mortgage lenders hire appraisers to confirm the value of a house before approving a loan. Some home sellers choose to take the extra step of hiring an appraiser, but it’s not required. The appraiser considers the characteristics of the property, such as how many bedrooms and bathrooms it has, as well as comps, similar to a CMA prepared by a real estate agent.

  • Pros: Professional appraisers are typically licensed or certified by the state they work in and can provide an objective opinion of the value of a home.
  • Cons: If you’re seeking a mortgage, you’ll have to pay for the appraisal the lender orders. An appraisal costs an average of about $340, but can be anywhere from roughly $300 to $420, according to HomeAdvisor.

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4. The cost approach

In the cost approach, the value of a property is determined by what it would cost to rebuild the building if it was demolished, or to build a similar structure. This approach is based on the logic that buyers will not pay more for the building than it would cost to construct a similar property today.

It takes into account the worth of the land the building stands on and any depreciation that has taken place.

“Insurance companies use the cost approach to determine if the replacement cost of an asset is in alignment with the value,” says Sanchez. “Institutional investors use this metric as a guardrail to ensure they’re not overpaying. They’re basically asking, ‘Is building new or buying existing properties better?’ and making sure the balance makes sense.”

How to implement the cost approach

As an example, an investor begins by using comparables to conclude that a similar plot of land is worth $40,000. She then determines that similar 2,000-square-foot homes cost $60 per square foot to build, or $120,000, and that this home has depreciated by 25 percent ($120,000 – 25 percent).

She then plugs these variables into the following formula:

Value of property = cost – depreciation + land value

In that case, the valuation calculation would look as follows:

Cost: 2,000 sq. ft. x $60 = $120,000

Depreciation: $120,000 x 25 percent = $30,000

Land value: $40,000

So, the value = $120,000 – $30,000 + $40,000, or $130,000.

How often should I check my homes value?

While you don’t need to revisit your home’s value too often, checking on it periodically, such as once a year, is a smart move for several reasons. Knowing the current value of your home allows you to determine, for example, whether your homeowners insurance policy still adequately covers the property.

“The value of your home also affects your taxes,” Reed says. “You might be able to lower your assessment.”

It can also be helpful to know the value of your home so you know how much equity you’ve accumulated, which could allow you to qualify for a home equity loan or line of credit, or cash-out refinance.

Of course, knowing the value of your home is very important if you’re considering selling. You’ll know where you stand with buyers, and what you could potentially take home after the costs of the transaction and taxes.

How comps determine home value

In order to determine a home’s value using comps, three to five comps are collected and grouped together. Then, a report is generated determining a market value, based on the sale prices and details of these homes. You could get two types of reports, based on who is doing the calculations:

  • Comparative Market Analysis (CMA): This is a report typically generated by a real estate agent, used to come up with an accurate list price/estimate of a home’s sale price.
  • Appraisal: This is a report generated by a licensed appraiser and it’s typically used for financing approval.

Keep in mind that the market value you receive from your agent or an appraiser can differ depending on a few factors.

Market speed: If your local real estate market is moving slowly, you might have to depend on comps that are older or less relevant, which could affect the results.

Comp selection: When multiple relevant comps are available, different agents or appraisers might choose to use different comps, which can affect the outcome slightly.

Valuation of features: The agent or appraiser will add or subtract value based on the features of a specific home, and different agents or appraisers may assign slightly different values to home features.

Subjective human nature: CMAs and appraisal reports depend on humans to evaluate and calculate the home’s value, which means you won’t get the same outcome every time. Remember, the true value of a home is how much a buyer is willing to pay for it.

What’s valuable to one buyer isn’t valuable to another

The value of some home features just comes down to individual buyer preferences. If a swimming pool is factored into the price of a home but you plan to just fill it in and re-landscape, it doesn’t make sense to pay extra for it. If you love new carpeting, it may be worth paying a little more for a house with new, high-end, wall-to-wall carpet. But if you’re going to tear it out to install hardwoods, it’s not. If your idea of home cooking is popping something in the microwave, you probably don’t want to pay a premium for a gourmet kitchen when a nice, reasonably sized one would suit you just fine.

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