If you’re considering buying or selling a home, you’ll see a lot of numbers—very different numbers—representing a home’s “value.”
The truth is that a home has many prices. There is its market value, a value for tax assessment purposes, a value for insurance purposes, a value for appraisal and lending purposes, and, of course, a sentimental value to you.
Here’s a look at multiple ways to consider home prices—and how they track or differ from its sale price.
When it’s used: To set the asking price on a home
A home’s so-called market value (or value on the current housing market) is typically determined by a real estate agent pulling “comparables” (see below) on a given home. By looking at the most recent home sales and what they sold for, and then adjusting for factors like age/size/finish quality of a current home, agents can use data to set a home’s price.
While to some degree it’s arguable that a home is worth what someone will pay for it, if you’re in a dynamic real estate market it typically takes a hard look at multiple homes to come up with fair market value. By averaging data such as price per square foot, sold price (a home may have sold for a low price in a deal between friends or family or for an artificially high price in a bidding war), and other researchable factors agents set so-called “market value.”
When it’s used: For learning how homes similar to yours are priced
When you work with a real estate agent to price your home for sale, they typically run a Comparative Market Analysis (CMA), where they review recently-sold or for-sale homes comparable to yours in terms of location, square footage, and features to determine what your home’s asking price might be. Typically agents find three or four homes that have sold recently and that are similar to the home to be sold, and then they look at the number of bedrooms and bathrooms, square footage, finish quality, price per square foot, and other factors. They use these factors—weighting and averaging them—to reverse-engineer a number for your home.
Some homeowners want to determine their home’s potential market value without having to tap a real estate agent to run comparables—perhaps because they’re considering whether refinancing makes sense, because they’re debating selling but not ready to discuss it with an agent, or are doing the math on selling versus remodeling. Still others just want to keep an eye on their home’s fluctuating value over time.
Sites including Zillow, (which offers “Zestimate” comps for free) and Redfin offer home valuations, and you can use Trulia or Property Shark to review data for specific properties as well as recent sales.
When it’s used: For borrowing purposes, such as when you take a mortgage or refinance.
If you’re buying a home or refinancing an existing home (i.e., initiating a new mortgage on a home where you’ve got some equity), lenders are going to provide financing against the home’s appraised value. They’ll send an appraiser to the home in question, and that appraiser, a trained and neutral market observer, will place a value on the home based on dozens of factors.
Appraised value can be a stumbling block in hot markets where bidding wars entice buyers to offer way above asking price. For instance, if you make the winning $300,000 offer on a home, but the home is appraised at just $250,000, your lender may not let you finance the property—or not in the way you planned.
Let’s say you planned to put 15% down ($45,000) on the $300,000 home and borrow $255,000, you’d need to borrow more than the home’s appraisal value—a scenario that is not likely to happen. You might have to cobble together an extra $5,000 and do a 0% down loan—if optional—that carries high interest rates. Or you might lose the home altogether if your offer was subject to a financing contingency.
Similarly, if you buy in a hot market and then, years later when the market cools off, you want to refinance your mortgage, you may find that the equity you thought you had isn’t there because the home now appraises for less than you expected. Appraisal value doesn’t stymie all buyers or owners, but for the majority of buyers who use a mortgage to finance their property purchases it’s an important value that determines the feasibility of your loan.
When it’s used: For tax purposes
Every home has a so-called “assessed” value, a value used by a local community’s assessment office as the base price against which property taxes are calculated. In some cases, a home’s assessed value is the same as its market value, but in others a home’s assessed value is lower than market value. In the latter circumstance, that’s good, since you’ll pay lower tax.
A property’s assessed value in the United States generally consists of two components—the site or land value, and the building’s value. Property taxes generally are the main funding source for local education, emergency services (fire fighters, police), and local infrastructure. Property tax rates vary by community, but they generally range from 0% to 4% of home value, according to data from the Tax Foundation.
When it’s used: For insurance
Your home will have yet another value for insurance purposes—replacement value, which is a calculation of what it would cost to construct your home. The cost to construct a home similar to the one you own will be high but typically always less expensive than a home’s market value. Insurers recommend reviewing home policies periodically, especially if you’ve invested in renovations and upgrades to your home, to make sure that you’re sufficiently covered.
Once an insurance company has determined your home’s value, a standard property insurance policy will use that home value as the basis for coverage, and it will also insure 10% of that value for external structures on the property (garden sheds, etc.) as well as up to 75% of the home’s value for personal property inside the home. You can buy additional coverage.