Understanding equity.
Property equity in simple terms is the difference between the current market value of your home, and how much you owe on your property.
Weather its a first and or second mortgage, a home equity line of credit, or a lien placed on your property title. Basically anything that will be required to pay off if you were to sell your home.
The difference, is your equity.
And the key to understanding how much equity you have in your home, is to have a comprehensive understanding of the true value at that point in time.
In this article I am going to talk about exactly how we do that, how we determine value. Being trained like an appraiser, and loving the analysis and study of the real estate market, I take my market analysis reports very seriously with putting in time, energy, and detailed care.
There are numerous resources online that will tell you the value of your home, however it’s important to consider what the algorithm is.
Online market analysis tools are great baselines for value, however they don’t have analysis of property condition, amenities, updates, and maintenance completed baked into their analysis for example. Which are some of the many key factors to finding value.
And I hate to break it to you, but your assessed property tax value, is not necessarily the true value. I’ve seen cases where the true value was lower, and I’ve also seen cases where it was actually higher!
Here is a step by step guide to determining your property’s value, to therefore calculate your property equity:
- Generate a list of sales in the area—Take a look at homes that have sold nearby. This takes some time, and there isn’t always an abundance of of data. Start small. Look back only 3 months, and within .25 miles of your home. Notice that there isn’t any data, take a look 6 months back, and then try to expand your radius, up to .5 miles. There is no one size fits all for this, because it really depends on your area. Homes in Minneapolis can vary more street by street than homes located in Minnetonka. So be mindful how far out you search. Stick to the same neighborhood if you live in a city with many different neighborhoods, nooks and crannies. And of course, stay in the same city!
- Narrow down your list—Once you have a healthy list of properties that have sold—cross reference them to make sure they are the most similar to your home in terms of bedroom and bathroom count, number of garage stalls, lot size, square footage. Eliminate any that differ too much. If there are no homes with your exact specs, that’s okay. Because in steps to follow we will make adjustments up and down depending on the differences. For example, if your home has 2 bathrooms and you are comparing your house to another with only 1 bathroom, then you would need to take the sale price of the 1 bathroom house and add a monetary adjustment up in price, depending on how much value the 2nd bathroom would add. More on this to come.
- Analyze the amenities the other homes have—Now look through all of the photos and the property details. Do the homes have similar amenities to yours? If you have a primary bedroom and bathroom suite with a full bathroom attached, and another house you are comparing to doesn’t, know that you are going to have to adjust up in value for your home. Meaning if everything else were the same, and that comparable home sold for half a million dollars, well your home is going to be valued more because it has an additional amenity that the other doesn’t. We cannot put an exact dollar amount to amenities, bedrooms, bathrooms, SF differences, etc… because every area is different. An extra bedroom in one city can be worth more than another, and an extra bedroom going from a 2 to a 3, is more valuable than going from a 5 to a 6. So it’s complicated when one is really diving deep into the analysis. Thankfully I love to do it, because it takes time!
- Cross reference sold dates—Once you have narrowed down your list even more, check the dates sold and consider any value increases or decreases that have taken place in the area. Normally when you only look 6 months back in time, you should be good here, and might not need to make any adjustments (take the economy, financial markets, and unemployment rates into consideration as well during this step). But when you are looking at homes that sold 1-2 years ago, you really need to consider appreciation and depreciation. As a Realtor, I have access to statistics that are pulled directly from the source, the Multiple Listing Service (MLS) where Realtors post their listing data and where 95+ percent sales are recorded.
- Find the average of the range of prices for the homes on your final list—Okay, you have your list! You have taken the time to narrow down the list. You might have 4-10 good comparable homes noted, also known as the comps. Take the range of sale prices, and calculate an average. Your homes value will fall in between that range. I eyeball it, meaning I adjust again from here up and down in my head while making another direct comparison to the finalized list of comps. I have been doing this for 10 years so it comes a little more natural for me. I am one call away from a free market analysis 🙂
Like I said, a market analysis takes time and detail, and even though I explained this the best way that I can, you need to be open minded because there are sill many variables in the equation!
Style of home, year built, uniqueness, everything contributes to the value and should be considered.
If you don’t have equity in your home, don’t worry… you might in the future! As you pay off your mortgage every month (and hopefully make extra payments), the amount you will need to pay off when you sell will continue to get lower and lower, and depending on your area you might experience property appreciation in the future.
You don’t have to be planning to sell to have a comprehensive market analysis for your home. In fact, I’d be happy to do it for free. It’s valuable information to have, and helps you remain a smart and savvy homeowner.
Understanding your investment is one of the first steps to protecting it. Give it attention!
Thank you for taking the time to read this article, I hope it helps you better understand equity and the steps to finding a property’s value.
-Josie Johnson