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The formula for evaluating home values

There are three components- E, P and H

John LaManna andI had another great discussion today about buying homes. Today we decided there were three components of the buying decision of a particular home.

Emotional Value
How do you feel about the home? Did it make you feel good? How did you feel about surrounding homes (your new neighbors) and the neighborhood itself.
Practical Value
Is the home the right size? Does it meet your needs including the size of the yard and is it functional? Is it the the right location relative to your lifestyle?
Home Value
How is the home priced relative to other homes in the area and other homes you are considering?

As you may know the emotional value is weighted much more heavily and the woman's opinion is also.

Trey
Founder, BuildingCredibility.com

Posted by tlangford at 7/29/2008 10:07 AM

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Comments (3)

Re:The formula for evaluating home values

My small comments

Emotional Value: What the woman says

Practical Value: Don't forget commuting distance, Energy costs (heating, cooling), GREEN, QUALITY (how did you miss this one), Crime stats in community, Maintenence costs, HOA's (and their health), Tax value of owning, School system, property taxes, % of renters in community, sun exposure, restrictions-zoning, by-laws

Home Value- Rent versus buy, debt to income, market trends. Looking at relative value would have bought you -40% loss in FL or Vegas so it might not be the best yard stick

4th Category- Financing (shouldn't be as important) let's face it we live in a credit card world so its all about the monthly payment, 0 down

Posted by emdeplam on 7/29/2008 11:39 AM

Re:The formula for evaluating home values

Sorry guys but I am actually closer aligned with emdeplam on this one. In my appraisal classes for my real estate brokers classes, they never addressed emotional and practical value.

The answer is really a mix of these three: Replacement cost; income approach; and then market approach.

A home will seldom sell for more than what you can rebuild (replace) it for. If it has potential to generate income, it's value is assessed based on it's ability to generate a return on your investment (CAP Rates, etc.). The final analysis is generally the market approach (based on all the socio-economic factors, is the home worth it?

Many times we use emotions as a tipping point, but in my 17 years I have never been able to collect residual value on emotional criteria.

I will do some research on my home and post the results in a new blog tomorrow about different visions/vantage points can lead to drastically different conclusions (all of which can be made to sound correct if someone doesn't look at the whole picture!

Jim Paulson, CRS, GRI, EPRO
Owner/Broker - Progressive Realty Corporation

Posted by Jim Paulson on 7/29/2008 11:45 PM

Re:The formula for evaluating home values

Wow, good to see Jim's comments, I haven't seen (that I can recall in recent memory) anyone on the MLS who seems to know what a CAP rate is, much less cash-on-cash.

I almost cringe everytime I see a property being marketed as an investment on the MLS. I've asked over and over for rent rolls only to find the property isn't cash flowing at all!

Emotional & "practical" values are variable on a buyer by buyer basis based on their perceptions and needs. The only things we can quantify are the three items Jim points out above (replacement cost, income based on a given cap rate, and market value).

Good comments Jim.

Scott Nicholson
Boise Valley Commercial Real Estate, LLC

Posted by Scott Nicholson on 7/30/2008 6:32 PM

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