I was having a conversation yesterday with a very intelligent person about the value of their home. It was during this conversation that I was reminded that while I think about the home valuation process quite often, most people do not. There are many homes for sale in Tallahassee, and determining value is critical right now.

After we had been talking for a while, this person asked me to give them the value of their home. He asked it in such a way that it told me he thought there was an exact, singular dollar amount “value” for his home, so I knew we had some “talking to do.”

Simple Principles of Home Valuation

The value of a home depends upon the paradigm of the viewer (the “valuer”). I always like to think that there are four different ways that we can value a home, and homeowners and real estate agents need to marry-up their current motivation levels to determine which value is right at the present time.

• Cost is the amount of money that it would take to replace the home today. This number is an estimate of what you would have to pay for a “replacement” homesite similar to the one in which the home is sitting, as well as what you would spend to build the actual structure(s) on the property. It is always important to look at this “cost approach” to home valuation so that you don’t kid yourself on what potential buyers could do were this home not available for purchase.
• Price is the amount of value established by the homeowner and the listing agent. This is an arbitrary figure that could or could not represent a value that potential buyers would feel compelled to view and potentially purchase the property.
• Value is what the property is worth to someone. If you have been in the real estate business as long as I have, then you have heard a few stories about somebody who paid an amount for a home that seemed to be “crazy high” compared to what else was happening in the market.
• Market Value is a price range that appeals to many buyers and causes a sale to occur within a reasonable time frame. This is the value that serious home sellers should be seeking from their real estate broker.

Value And Motivation Go Hand In Hand

The most important thing for a homeowner to understand is that their current motivation is the most critical factor when determining the value of their home. In order to illustrate, let us look at three common situations in which many potential home sellers find themselves:

• “If  I could get a certain amount from the sale of my home, then I could afford to buy the home in the area in which I have always wanted to live.” This is an example of a home seller who has the luxury of setting a price to see what will happen. Unfortunately, this seller will not get their home sold in today’s real estate market, where supply is way too high to generate enough activity to get this home viewed by serious home buyers. Often times, we say this seller will be the “highest bidder on the house,” meaning the seller values the home more than buyers do.
• “I know the Johnson’s sold their home down the street for $X, and my home is as nice as that, so I will ask for $X as well.” This homeowner is hoping that a past event will re-occur again in the form of another home sale. And it might. Of course, it most likely will have no bearing on what will happen in today’s real estate market, with a different buyer. Typically, prospective home buyers choose what they feel is the best value on the day that they make their home buying decision. Therefore, the fact that prices have been dropping paired with an abundance of choices for home buyers suggests that this seller will not receive an offer either.
• “I need to be out of this home by the end of May to start my new job in Atlanta on June 1st.” This homeowner has a good chance of selling the home as long as he prices his home within a market value range that appeals to many buyers. This price can be determined by looking at comparable homes for sale in Tallahassee … in other words, his competition, and priced to be the best buy.