Finding Your Home Value
If you’re thinking about selling your home at some point, I’m sure you’ve wondered about the value of your home. While the internet makes us believe we do anything, the traditional methods of finding a property’s real market value are still king.
- Finding Home Value With Online Tools
- Two Best Methods of Home Evolution
- Calculating Equity & Appreciation
Finding Home Value With Online Tools
Websites like Zillow, for example, go by algorithms instead of reality. Emily Heffler, Zillow’s director of communications, reputation management, and chief Zestimate wrangler, stated the following: “It’s a starting point; it’s not an appraisal. It’s a computer, and we haven’t been to your home. We haven’t seen your new kitchen.”
However, the Zestimate error rate in Chicago, Illinois, is surprisingly low at 3.8%. On the other hand, 41.4% of Zestimate’s are not within 5% of the actual sales price. Ouch.
Two Best Methods of Home Evaluation
As a Realtor, I believe two there are only two concrete ways to find the actual market value of your home: a comparative market analysis (CMA) or an appraisal.
The Traditional Way to Find Home Value
A comparative market analysis is usually done by a real estate agent once you have hired them. First, the agent will find similar homes to yours sold within the past six months. Each real estate agent will have their own method of making price adjustments based upon the difference in features between your home and the comparable properties.
Furthermore, real estate agents will usually have a relationship with an appraiser. Thus, allowing the agent to reach out to help with pricing your home. This might happen if there is a lack of comparable homes in the area. Some of the causes could be a slowing seller’s market or a lack of recently sold inventory.
Hiring an Appraiser
It also wouldn’t hurt to hire an appraiser before listing your home. Before listing your home for sale, it also wouldn’t hurt to hire an appraiser to find out how much your home is worth. In fact, 28% of homeowners in the U.S. have found their property’s real value through an appraiser.
You’re going to have to deal with an appraiser during the home selling process anyway. This is because the buyer’s lender will order an appraisal to make sure they’re not lending more than your house is actually worth. All in all, there’s really no way to get around it. But unlike a CMA, this method of home finding your home value will cost you a few hundred bucks.
Calculating Equity & Home Value
- Months, Amount Paid to the Principal
- Getting Your Home’s Appreciation of Value
- Calculating Your Profit Margin
Let’s say you’re a first-time homebuyer and you bought a house for $112,000, and your overall plan is to upgrade within the next five years. Your mortgage is an FHA loan with a 15-year term, and you put 3.5% of the purchase price down.
The reason for going with a shorter loan term is because you’re not staying there for a long time. Although a 30-year mortgage would be cheaper per month, the higher monthly payments will allow you to gain more home equity.
Okay, the earth has finally revolved around the sun five times, and now you’re ready to sell! But now, you need to calculate how much your home has increased in value over five years. This is very important to know, especially if your next home purchase will be contingent upon the sale of your current home.
Even though the equations below may look confusing, it is nothing more than elementary math. Just follow along, take your time, and pay attention.
- Purchase price: $112,000 (plan to sell in 5 years)
- Monthly mortgage note: $1,120
- FHA 15-year loan: $3,920 3.5% down payment
There are 12 months in a year, and you’re selling after year 5. For this reason, we’re going to multiply 12 by 5 first, which will allow us to find out how many months you lived in the house.
Months, Amount Paid to the Principal, and Equity
12 x 5 = 60
Next, we’re going to multiply 60 months by your monthly mortgage note, which is $1,120. This will allow us to get the total dollar amount you paid back to the bank.
$1,120 x 60 = $67,200 + $3,920 = $71,120
Alright, $71,120 is what you paid to the principal in 5 years, which is also 60 months. Third, we’re going to subtract the amount paid back by the original purchase price. Afterward, you’re going to add your down payment to the sum of the equation. Thus, allowing you to find the total dollar amount you have in equity.
$112,000 – $71,120 = $59,920 + $3,920 = $63,840
In the words of Tony the Tiger, that’s grrrrrreat!
Getting Your Home’s Appreciation of Value
With this in mind, we will say that your house has gone up in value at an average rate of 4.3% each year. Below we’re going to find the actual numbers of appreciation.
$112,000 x 0.043 = $4,816 + $112,000 = $116,816
The first number is your original purchase price times the percentage of appreciation (4.3%), which equates to $4,816, the value-added for year 1.
Next, we will add the average percentage of value gained to the original purchase price of $112,000. As we result, we get $116,816. The next step is to add $4,816 to the home’s value until we get to year 5.
Purchase price: $112,000 + $4,816 = $116,816.
3: $127, 078
To get the sum of the homes’ appreciation, subtract year 5’s number of $138,241 from $112,000.
$138,241 – $112,000 = $26,241
As a result, we can see that your house has appreciated a total of $26,241 over five years. Next, we’re going to add $63,840 to $26,241 to get your total amount of equity. To bounce back to the previous phase of the equation, you have a total of $90,081 of equity in your house. Nice!
Calculating Your Profit Margin
Now we’re finally going to fast forward to the sale of your home, which sold for $138,000. With $90,081 inequity and a sale price of $138,000, the difference between those two numbers is your profit.
You will shortly find out that your profit is $47,919! That is a very handsome 42.8% return-on-investment during a five-year holding period! Not too shabby for a first-timer, huh?
Just in case you’re curious, you multiply the decimal by 100 because we are looking for a percentage out of 100. Once calculated, the decimal will be shifted over into the correct spot, giving you your final number.
$47,919 / $112,000 = 0.42784821 x 100 = 42.8%
And that is the true market value of your home!