As the housing market appears to be bouncing back in many parts of the country, you may be wondering: What's my residence worth now?
There's actually more than one answer, according to Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. He says your home has three, potentially very different, price tags based on its:
- Market value
- Replacement value
- Property tax value
"Since different values can be used for different reasons, it's important to understand when each applies," Halliwell explains, adding that some of these values may move in different directions at the same time.
Here's a description of the values and why you should understand each one.
Market Value
What Is It?
Market value is the dollar amount that homes in your area are bought and sold for. It's the measure most homeowners think of when they try to estimate their home's worth or value. Determined in part by the going rate for similar houses in your city and neighborhood, and even on your street, market value is not based on what you paid for the home or how much it cost you to finish out the basement, re-roof or remodel the kitchen. Many intangibles, such as curb appeal, location, amenities and condition, factor into this figure.
Why It's Important
Understanding the market value helps you calculate your total net worth as well as how much equity you have in your home. To calculate the equity you have in your home, simply subtract the amount you owe on your home from its market value: That's your equity, or about how much profit you could receive from a sale. That's money you could use in a variety of ways:
- To buy a bigger house.
- To trade equity for cash in case of an emergency.
- To pad your savings account if you downsize to a smaller home.
- To pay down debt, if you choose to rent and free yourself from a mortgage.
To strengthen your negotiating position with potential buyers, get an accurate idea of your home's market value. A real estate agent can tell you the selling prices of similar homes in your area, helping you set reasonable expectations.
"If your area is in a buyer's market, your home's market value may be lower than you'd like. You might not have as much leverage against a buyer who wants to negotiate, so you need to know where you're starting," Halliwell explains.
A real estate agent who walks through the property, inside and out, can provide an estimate of your home's market value and offer advice on making your home more attractive to prospective buyers.
Even if you're planning to stay in your home, market value matters when taking out a home equity line of credit or home equity loan. For example, you may be planning a major kitchen redo and need $40,000, or you want to tap your equity to help pay your kids' college tuition. Depending on your creditworthiness, many lenders will allow you to borrow up to 85% of your home's value, less any mortgage or other equity loan on that property. Also, a lender may order an appraisal to determine the market value of your home.
Replacement Value
What Is It?
If your home is completely destroyed because of, say, a fire or natural disaster, replacement cost is the amount it would cost to remove all debris and rebuild the entire structure from the ground up based on current construction costs in your area.
Granted, very few claims are total losses, says Cedric Matterson, a senior staff underwriter with USAA. But if you're a victim of a fire that consumes your whole house, or your home is in the path of a vicious storm, you'll be relieved to have a homeowners insurance policy that covers the entire financial burden of rebuilding.
"Our philosophy, which is backed by years of experience, is that homes should be insured for 100% of the minimum estimated replacement cost," Matterson says. Unless your insurance covers replacement costs, he explains, you run the risk of coming up short if the costs to rebuild your home are more than your coverage will pay. For example, if your home costs $200,000 to rebuild but you have insurance coverage of $175,000, you're going to have to come up with the difference of $25,000.
Replacement value can include the cost of tearing down and hauling away the old structure. Keep in mind that homebuilders offer volume discounts that can drive down the price of new homes but may not necessarily reduce replacement costs when yours is the only house on the block under construction.
Why It's Important
As building costs go up, homeowners insurance can shield you from rising building costs.
"It's very possible to see local building costs increase while market values decline," says Halliwell. "This can lead to a situation where you actually need more dwelling coverage, despite seeing your home's value drop."
Property Tax Value
What Is It?
This is the home value that taxing authorities use to calculate your property tax bill. A given home may be taxed by more than one jurisdiction -- hospital and school districts, for example -- and each may apply its own math.
Typically, property tax values are meant to approximate the home’s market value, though sometimes there's a big discrepancy between the two because of outdated assessments or mistakes by assessors, for example.
Why It's Important
An accurate property tax valuation ensures your tax bill isn't too low or too high and helps to ensure that your entire tax burden is understood.
If the property tax value of your home exceeds the market value, consider contesting the value with your taxing authority to reduce your tax bill. And be aware that certain actions on your part, such as remodeling, could cause a reassessment of the property value and result in a larger tax bill in the future.
