Whether amid the overheated housing market of the 2001s or in today’s more dodgy market, a recurring theme is the desire to answer the question, what is my property worth. The matter of how to value a property, unfortunately, is not so simple as getting a home appraisal estimate. HIR offers here some enduring lessons that we hope might avoid heartbreak and bankruptcy in the future.
7 Valuable Considerations When Asking “What is My Property Worth”
1. Subjective Value. One of the first rules of economics that a surprising number of people don’t seem to appreciate is that the value of something is, precisely, the price at which the seller is willing to sell and the buyer is willing to buy. That is to say that value is subjective. For a brief illustration, consider the difference in your reaction if someone offered to trade you the Hope Diamond for a glass of water either on an average Saturday morning at your front porch or while you were dying of dehydration in the middle of the desert. The value of the glass of water completely changes for you in the different circumstances. So, unless we understand the circumstances of buyer and seller, we’ll know nothing about what constitutes value for them. This leads to some obvious conclusions.
2. Motivated Sellers. If the sellers have a great need to sell, such as if they are facing unanticipated financial hardship or got over eager and bought a new house already, we would expect them to be more downwardly flexible in their selling price, than say if they were just testing the market. On the other hand, sellers who have decided they’d like to move, but it isn’t urgent, can fall in love with their house and value it higher than potential buyers do. So sellers can be under- as well as over-motivated.
3. Motivated Buyers. The same kind of situation can exist the other way around. Buyers can fall in love with a house on the market, leading them to value it far above what other buyers do. Or they may have already sold their old house. This may not be as motivating as the seller who has already bought. The latter can be struck with two mortgages while the former may have to settle for a rental. But if there is a sizable family involved, renting may not be a very desirable option. There are , though, buyers, too, who are just testing the market; they would take just the right thing if it came along, but aren’t very upwardly flexible in their price.
4. Market Price. Given all this, some swear by the standard of going by the market price and there’s a good deal of “finding comparables” – houses on the market that have the same or at least similar qualities as the one under consideration. There is of course some subjectivity to what qualifies as comparable, as will be known by anyone who has been through such a process. Remember, though, the market price is just the average of the price that most sellers will sell and most buyers will buy. There’s nothing more magic about it than that. Consider two factors.
5. Is the market sound. It’s more than what may be reasonable to expect you to develop deep insight into high finance just to buy a house. If you want to purchase safely, though, you do have to ask some hard questions about the market you face. Many people in the 2001s thought they were making market-wise decisions in buying homes, but they didn’t consider the soundness of the market. In that case, the market was artificially overheated by non-market value interest rates and various government subsidies to buyers and lenders. Unless you believe that sort of thing can last forever (hint: it can’t), that would be a market to avoid. If you feel the market price is too high, look for the reasons, such as government intervention, which may be pushing the price above its natural market value. If you find such reasons, keep out.
6. What’s it worth to you? Again we come back to subjective value. You have to make a tough decision, here. Back in the 2001s people bought houses they couldn’t really afford because they were afraid of getting priced out of the market. Other’s though, exercised more discretion and after the 2008 collapse suddenly found themselves much more in the position of buying an affordable house as the overheated prices fell. If you can’t afford the going market rate for the house you’d like, you either can’t afford it, which means to need to build up your finances, or the market is artificially inflated, which means you have to bide you time. In such government interventions, the funny money will run out and the chickens will come home to roost. Be ready to benefit by buying low; don’t suffer the costs of having bought high.
7. A home, not just an investment. The last word on this is that of course a home is the largest, most expensive investment most of us ever make. However, if you treat it like a mere store of value, ready to be flipped when the time is right, you are playing with fire. There are times to change houses, such as when more children are on the way. It has to be done, though, in a reasoned, cautious and informed manner. If you always choose the house for its qualities as a home, for the happiness it will bring to you and your family, and are prepared to stay and enjoy those qualities over the long haul, you’ll find that the inevitable market fluctuations will not disturb your sleep. If you’ve bought wisely, your greatest investment will be not in a house, but in a home.
BONUS NOTE: Real estate brokers may be eager to help out with insights about comparables and how motivated the seller or buyer may be. Remember, though, they are humans like everyone else and since they make their money as a percentage of the sale price, they have an inevitable vested interest both to get the house sold and that it sell for a higher price. The general thinking is that these two incentives offset each other. You want to be careful, though, that the compromise between those incentives isn’t made at the expense of your family’s bank account.
These remarks have suggested to you that the matter of how to value a property is not so simple as getting a home appraisal estimate. Hopefully they provide some enduring lessons that might avoid heartbreak and bankruptcy in the future. Answering the question, “what is my property worth,” is indeed a subjective question, which only you can answer.