How much is your home worth?

I'm talking about its dollar valuations; "priceless" is not one of the options here  (And think about the trouble that the MasterCard ad series has gotten us into: that using credit to afford a "priceless" family experience is a wise thing to do.)

We get a lot of different valuations on the same piece of property, and it is worth looking at all of them, and understanding the differences among them and the significance of the various figures.  I'll list all the valuations I can think of, and hope you'll add others in the comments.

1. The valuation one gets when one applies for a purchase-money mortgage
2. The valuation one gets when applying for a cash-out refinancing
3. The valuation for homeowner's insurance
4. The valuation for property tax purposes
5. The valuation for estate tax purposes.

Let's look at these individually, and see how they relate to each other.

1. The valuation one gets when one applies for a purchase-money mortgage

Depending on how much one wants to borrow, this valuation might be well above the actual value of the property in the current market, or well below it.  An older purchaser, with a 60% down payment doesn't care much how high the valuation is, though it might be in the best interests of the selling broker for the valuation to be high.    It is clearly in the mortgage broker's best interests to get "the full amount [you] had in mind."

This valuation is generally based on "comparables" -- properties near yours that have sold recently, with adjustments made for size of lot, for location, for the building size, for number of bedrooms, number of bathrooms and fixtures, fireplaces, kitchen amenities, etc.  So land value is only tangentially taken into account.

2. The valuation one gets when applying for a cash-out refinancing

When one applies for a refinancing which involves taking out additional cash, getting as high a valuation as possible is probably in the owner/borrower's best interests, at least in the short term.  It is also in the mortgage broker's best interests.

3. The valuation for homeowner's insurance

For insurance purposes, there are two issues: the mortgage lender requires that his interest be protected.  The lender's insurable interest is not, however, necessarily equal to the amount of the mortgage.  Because a fire would not destroy the value of the site, the amount that needs to be insured to satisfy the mortgage lender is the difference between the land value and the mortgage principle.

But that's only half the story.  One needs to think about what it would cost to rebuild a house of comparable size, quality and amenities at current construction costs, without regard for the lender's interest. 

This is not the same as the current value of the existing building, because unless the house is brand new, it has depreciated. (A Federal Reserve Board Study -- May 2006 -- estimates annual depreciation on single family homes at 1.5%.)    You might look at the depreciation table in the assessor's tables from a few years ago for Westport, CT.

4. The valuation for property tax purposes

For property tax purposes, the local assessor values each property.  But depending on the laws of the state and local traditions, the assessed value may bear little or no relation to the market value of the property.  In California, for example, Proposition 13 requires that assessments rise no more than 2% per year, until a property is sold, so people who bought in the 60s or 70s may have assessments that are a tiny fraction of the market value, while their new neighbors in identical houses may be assessed at full market value.  In Connecticut, state law requires that assessments be for 70% of the market value, a factor which, as best I can tell, is meant merely to confuse things.

Good valuations are pegged to the market value of the land plus the depreciated value of the current improvements on it.  Every transaction followed by a teardown is evidence that 100% of the transaction price is land value, and to that transaction price must be added an allowance for the cost of removing that building -- perhaps $10 per square foot.

Land value is relatively easy to assess properly, if that is what one sets out to do. It is often said that one can gather 10 local people who are knowledgeable about one's community, with a map of town, and they could reach a rather quick consensus on the market value of every lot in town.

Buildings are harder to assess.  Each needs to be visited and its amenities and condition judged. [And a very good case can be made for not taxing buildings at all.]   

5. The valuation for estate tax purposes.

I've got some anecdotal evidence that valuations of residential properties owned by people whose assets are high enough to put them in the estate tax range (over $2 million net estate -- which means less than 1% of us) manage to get very favorable valuations on very valuable real estate.   Property which later gets sold for many millions of dollars gets valued for estate tax purposes at a tiny fraction of its real value.  A generous gift to the heirs from the rest of us.  Indefensible.

6. The valuation a real estate broker provides in order to seek your business when you are considering selling your home.

And there may be other valuations as well.

What should we be doing?  Obviously one step is to understand the differences.  Another is to focus on doing the property tax assessments well and frequently, and to put them online so that all can access them; the quality of those valuations will improve rapidly!     Value the land first. Treat the existing buildings as the difference between the market value of the whole property and the land value.  Map the land values, so that everyone can see how land values in their neighborhood relate to land values in other neighborhoods. 

And perhaps our states should require every town or county to do the revaluations every few years, to a high standard of quality.  Don't leave that decision to the local level.  Justice depends on all communities doing this well and updating it frequently.

Our state legislatures should do one other thing: follow Pennsylvania's lead, and give counties, cities and towns the option, for all the property taxes they utilize, of using a higher millage rate on land than they use on buildings, even of eliminating the millage rate on buildings completely.   

Armed with good valuations, individual towns can take advantage of the option to tax their land values highly, and their buildings lightly or not at all.  Those who choose to use this tool will see economic development in their locality escalate.

Afterthought: It occurred to me that it is worth saying something about Zillow's price estimates.  They seem to be based largely on the square footage of the home, and on the "dollars per square foot" that other nearby homes have sold for.  But nearby homes may be much larger or smaller, may have more or less land, may have excellent views or waterfront, and therefore not be a good comparison.  Importantly, the land value is implicitly treated as, depending on how you look at it, equal among "comparables" or zero.  Neither is likely to be the case, except maybe in a cookie-cutter subdivision; and even there, some locations may be superior to others, and sell for more (backing on a nature preserve, say, or away from a highway, or on a quiet portion of a golf course, or whatever).

Comments

[Zanis]

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