How to estimate the value of real estate

There are many types of real estate value definitions, but the most commonly used is “market value.” Simply put, market value is the most probable price a willing buyer and seller will agree upon in an open market, each being well-informed and under no undue pressure. The key phrase in this definition is “most probable,” which implies the use of probability and statistics. Of course no buyer or seller is that well-informed, everyone is under some kind of pressure to buy or sell and no market is completely open.As in the stock market, the price that someone pays is not necessarily the same as the value. Statistical analysis has shown that real estate buyers consistently pay from 5 to 10 percent above and below market value for no apparent reason. It’s important to look at a large number of sales to determine where the most probable value lies.Value is always an opinion. Value is different than “price,” which is the actual amount someone paid or the amount someone is asking. And price is different than “cost,” which refers to the actual cost of construction and development.Because value is always an opinion, anyone who has an opinion can be a real estate appraiser. However, if you want a reliable opinion the most important appraiser qualifications to consider are impartiality, honesty and integrity; expertise in the local real estate market; expertise in the type of property being appraised; and access to real estate data. Impartiality, Honesty and Integrity Impartiality, honesty and integrity are probably the most important appraiser qualifications. An inexperienced but honest appraiser will always produce a more reliable opinion of value than a biased appraiser with more qualifications and experience. The experienced appraiser knows how to support values slanted in favor of his or her client. The appraiser with real integrity knows how to do it but won’t.When a real estate agent conducts a listing presentation, their estimate of value is part of the sales pitch. If they recommend a listing price that’s too low, the seller may list with another agent. If they recommend a listing price that’s too high the property won’t sell and they will waste time and money promoting the listing.Most appraisers are accustomed to clients who pressure them to push the value estimate in their favor. Sellers want high values and buyers want low values. Mortgage underwriters and real estate agents want the appraised value to be identical to the purchase price. People getting tax breaks for charitable donations want high values. People paying taxes want low values. Homeowners seeking second mortgages want the highest possible value.