What determines a home’s value?

What determines a home’s value? Location, condition, and age count more than improvements.

Do you know how much your home is worth?

The answer might not be as obvious as it seems. Because, in fact, most homeowners have only a vague idea of their home’s true value, and that vague idea often is based on outdated, inaccurate or anecdotal data.

With that in mind, here’s a look at the factors that do—and don’t—determine a home’s value.

What determines a home’s value

• Location. Old jokes aside, location really is the most important determinant of value in real estate. That’s because a rundown structure can be demolished or remodeled, but a bad location is what brokers call an “incurable defect,” something that can’t be changed by any amount of time, money or effort. A house in a more desirable location is simply more valuable than one that’s in a poor spot, whether that means an unattractive neighborhood, a low-ranking school district or a commercial property next door.
• Condition. Second only to location, a property’s condition also weighs heavily in its value. A house that’s well-maintained and up-to-date in its style and décor commands a higher valuation than a property in a similar location that’s in need of major repairs. Condition refers to more than a fresh coat of paint. Appliances, electrical wiring, plumbing, the roof, landscaping, doors, windows and many other components of a home are part of its overall condition.
• Age. As a general rule of thumb, newer houses are worth more than older houses that are otherwise comparable in terms of location and condition. That’s because older buildings require more maintenance as all the major components, even those that last for decades, eventually deteriorate and have to be replaced. One exemption: a restored vintage or historical home can be a special case, demanding a higher valuation despite its advanced age.

What doesn’t determine a home’s value

• Appraised or assessed value. An appraisal of a property’s value, whether it’s performed by a licensed appraiser, property tax assessor or computer model, is only an opinion of value, not the value itself. That’s not an easy concept to grasp, but it’s an important distinction since appraisers, assessors and automated valuation models don’t always agree, aren’t always correct and don’t necessarily represent market value or the price at which the property could be sold. These valuations are useful, but not determinative factors.
• Asking, listing or offer price. When a home is listed for sale, the owner, with the help of the listing broker, decides how much to ask for the property. But buyers might have a different opinion of the property’s value. The price the owner asks isn’t necessarily the price any buyer will be willing to pay. That’s why sellers need a realistic view of their home’s value.
• Pending or sold price. Similarly, the price at which a property was under contract or sold in the past doesn’t necessarily reflect how much the property is worth in the present. And the longer ago that prior sale occurred, the less likely the price is still an accurate valuation. Recent sales of nearby comparable properties are a handy reference, but not necessarily a perfect indicator of a specific home’s value at a certain time. Every property is unique and realty markets are always in flux.
• Improvements. Most homeowners believe major improvements increase a home’s value. That’s true, but only up to a point as most upgrades cost more than they return in the property’s worth. An annual study by Remodeling Magazine compares the cost and return of dozens of high-end and mid-range home improvements in 35 major cities through the U.S. Though there are some outliers, nearly all of these improvements return only 50 – 70 percent of the cost.