Finding the Value of a Home
Price, Cost and Value in Real Estate
The price is what the home seller asks for the home. Cost is the investment a buyer makes to actually purchase it. The value is derived from what an informed buyer and willing seller, free of duress, can agree upon. Value is a constantly moving target in today’s San Diego real estate market.
Another way to say it is, Price is what you pay; Value is what you get.
4 Methods to Value Real Estate
There are four commonly used tools that home buyers and sellers rely on, but they vary significantly in the method as well as the final conclusion.
An appraisal is an opinion or estimate of value based on specific guidelines, made by individuals who are licensed and possibly certified. Buyers and sellers may be reluctant to engage an appraiser because there is a fee of several hundred dollars, which must be paid in advance – even if no sale is ever consummated.
Broker Price Opinion (BPO)
A Broker’s Price Opinion (BPO), as defined by the National Association of REALTORS®, is an “estimate of the probable selling price of a property.” The Dodd-Frank Act describes a BPO as “an estimate … that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model.”
Comparative Market Analysis (CMA)
A Comparative Market Analysis (CMA) is a commonly used tool of salespeople to provide information to buyers and sellers to facilitate a sale. In most cases, it would be difficult to distinguish a CMA from a BPO because the steps considered are essentially the same and practitioners commonly use the terms interchangeably.
Automated Value Model (AVM)
Another method, the Automated Value Model (AVM), uses software to search available data on the Internet to arrive at an approximation of value. Zestimates found on the Zillow site use this method. AVM’s may not consider all the market activity such as MLS sales and active listings. They can’t make adjustments based on human experience and market knowledge.
A Grain of Salt
In today’s rapidly changing real estate market place, it’s advisable to take all of the data described above with a grain of salt. The bottom line is this: Past sales currently have little relevance to current market values, given the lack of inventory and abundance of “bidding wars”.
Many buyers are learning from their experience of losing numerous homes to the bidding war that it does not benefit them to save $10,000 on a home they don’t get.
Be informed, but take into account two important factors:
- How long will you live in the home?
- How disappointed would you be if you lose it?
Then make an offer which reflects those factors. There is no predicting what home prices will do in the short term, or even over a period of time, but buying a home is not just an investment. It’s about your family’s quality of life. Why use short-term logic to make a long-term decision? Happy hunting.