(NOTE: This turned into a longer blog post than originally intended…and could have been longer. It is a complex subject, that deserves a lot of attention).
People often ask us what is my home, condo or land worth? After all, we are supposed to be the experts…right! This is a tricky question for several reasons, one of which is that there are so many definitions of value. The advent of AVM’s (automated valuation methods) has added to the complexity of this answer. Most fundamentally, real estate is difficult to value because it is not considered a “liquid asset”.
In order to address the question “What is my home worth?” properly, it is a good idea to understand the definition of the many different ways properties may be valued. Here are a few of the terms you will hear and a little about each of them.
- Appraised Value - The appraised value of a property on Maui (assuming we are talking about a single family home, piece of vacant land or condominium) is the unbiased value according to a qualified appraiser after a site visit and thorough analysis based on property facts, analysis and market trends. Although I am not not an licensed appraiser, my understanding is that a professional appraiser utilizes a formula that includes a combination of the cost approach and a sales comparison (or comparable sales) approach to determine the Appraised Value. There is a third component used in commercial and investment properties called the income approach which utilizes Net Operating Income or NOI and return to establish the value.
Appraisals are a fair and often very accurate way to get an understanding of the value of a property. Unfortunately, appraisers cannot capture some of the intangibles that improve the value of a home / property. Appraisers are also biased by trends and external pressures. Many appraisers now are being extremely conservative with their appraisals since they were blamed as co-conspirators in the housing bubble. It is unfair to assign blame to appraisers for the housing bust. Suffice it to say that there are honest appraisers and dishonest appraisers just like in every business / profession whether it be real estate, lending, law, medicine, finance etc.
- Assessed Value - Here is fairly generic definition of Assessed Value followed by definition by Maui County. Assessed Value is the dollar value of real property assigned by a public tax assessor for the purpose of taxation. In Maui, according to the official County of Maui website, assessed values are defined as “100% of fee simple market value using the cost and market approaches to value.”
People often confuse the Assessed Value of their property with the Appraised Value. Appraised Value and Assessed Value are very different animals, or as we say on Maui, Pineapples and Mangoes. Assessed Value is a number we see as property owners at least once per year, approximately March 15 on Maui. One would think that it is an accurate number since it is used as a basis for taxation. The theory sounds great, however, I have seen a lot of extremely poorly assessed properties on Maui. Furthermore, Assessed values tend to greatly lag the market (good during good times and bad during bad times). I would use Assessed Value as a benchmark or a data point, but never anything more.
- Automated Valuation Method - Unless you have been living under a rock (or on a rock if you live on Maui) you’ve probably heard of Zillow. Zillow is website which uses a proprietary algorithm to provide an automated calculation of the value of a property. That calculated value is called a “Zestimate”. I have seen some really bad “Zestimates” on Maui (35% error) and some fairly accurate ones. There are a few other sites that provide a similar service. AVM’s are controversial in that they may work fairly well in a homogeneous neighborhood or condominium complex, but they cannot address the fact that no two properties are alike, and cannot provide the context that a human expert such as an appraiser or real estate professional can provide.
- Market Value – The intersection of the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. With substantially tighter lending and appraisal guidelines these days, appraised value comes into play. Unless the transaction is a cash purchase or has an extremely large down payment, the appraised value and market value are going to have to match.
So what’s your home worth? If I had to choose between the first three methodologies, and had the available funds, I would certainly choose Appraised Value. In addition, I would seek the opinion of an experienced, licensed real estate profession to obtain a Broker’s Price Opinion / Comparative Market Analysis. When I am given such an assignment, I utilize all of the tools at my disposal to help determine the Market Value, including using the three aforementioned methods, my local knowledge and business experience. At the end of the day, the answer is best determined by the market.
Please contact me or any of The Maui Real Estate Team professionals if we can help you answer this question or you would like to discuss anything else related to the Maui Real Estate market.