4+ Important Things to Understand About How Realtors Value Properties 

Understanding how a property is valued – and what its fair market value is – can help you make well-informed decisions, invest in the right upgrades, and avoid leaving money on the table when buying or investing in real estate. After all, real estate properties are, for most households, the investment of a lifetime. 

Yes, a house is worth what someone will pay for it – but, when it comes down to securing a good deal and safeguarding your finances, not much should be left to chance. Here are some insights to use as a guide when selling, buying or investing in real estate. 

Before We Start: What Does Value Mean?

With so many factors at play, real estate valuation is a complex field – made all the more difficult by the fact that properties can have more than one value! Depending on the kind of valuation you go through, your realtor might offer different estimates:

• Fair market value – this is the theoretical price a buyer would pay for a property, usually in accordance with the current demand for similar properties.

• Liquidation value – liquidation value is often lower than fair market value (around 80-90% of its market value and refers to the price of a property offered at auction. 

• Value-in-use – this estimate refers to the value that a property offers its owner when in use. For example, short-term vacation rentals have a value-in-use related to the revenue they can reel in. 

Dynamics Such as Real Estate Supply and Demand Can Play an Important Role

Real estate market trends play an important role in how property prices change. Factors such as the relationship between supply and demand, inventory levels and availability of new properties, interest rates, and the economic outlook of a certain area can influence a home’s overall value. 

For a practical example, it’s enough to look at what has been happening in the American real estate market over the past two years. As the pandemic hit, many households had to deal with unprecedented financial uncertainty, reconfigure their lives, and look for safer investments. 

This combination of factors, made even more complicated by record-low interest rates and inventory, caused house prices to skyrocket all around the nation and create what is today one of the hottest seller’s markets on record. 

Market Trends and Property Features Can Impact Your Home’s Value

Each property is unique, boasting different, hard-to-value tangible and intangible features. For example, the location, floor plan, amenities, age, size, and build are just some of the factors that will influence a property’s price.

On the other hand, market trends are changing what house buyers look for in their new homes. In particular, in today’s post-pandemic scenario, buyers are valuing larger outdoor spaces, dedicated home offices, and areas for at-home workouts – and realtors will consider these factors when pricing a property! 

Keeping an eye on real estate market trends can help you find the best ways to increase your home’s value. 

An Online Home Value Estimation Can Help Give You a Rough Idea of What Your Property is Worth

In the US, single-family home appraisals can cost upwards of $450. If you are on the verge of selling your property, this is a small price to know the value of your property before setting the asking price.

On the other hand, if you are tracking the market to pinpoint the best time to buy or sell, home valuations can be extremely costly. 

In this case, using automated valuation models such as the SoFi property tracker can give you an understanding of how much your property is worth, what renovations would boost the home’s value, and what buyers are looking for in your area. 

What’s more, automated valuation software accounts for records like property transfers, tax assessments, and demographics to offer a “confidence score” – or the approximation error on the valuation. 

There Is More Than One Method Used to Appraise The Value of a Property

There are several, equally-valid methods to determine the value of a property. The once commonly used by realtors include:

• Sales comparison – when using this approach, realtors will analyze comparable properties (known as “comps”) in the local area to determine the value of your home. Home and lot size, as well as age, location, and amenities, are some of the factors considered.

• The cost approach – when realtors can’t find “comps”, they will resort to the cost approach – or a sum of the cost of the land in a certain location and the cost of building a home on it. Factors like physical deterioration and economic obsolescence will be accounted for in a process called “depreciation”.

• Income capitalization – for properties that deliver revenue, such as rental properties, apartment buildings, and office buildings, realtors will use the income capitalization approach to determine how much value the building generates. 

Ultimately, a home valuation can give you a precise estimate of how much your investment is worth and what equity you hold in it. But don’t forget that the value of a property isn’t always the same as what you’ll sell it or buy it for!