Which Value Do You Want?

What your home is worth depends on why you ask the question. It could be one value based on a purchase or sale and an entirely different value for insurance purposes.Values-250.png

Fair market value is the price a buyer and seller can agree upon assuming both are knowledgeable, willing and unpressured by extraordinary events. This value is generally indicated by a comparable market analysis done by real estate professionals.

Insured value is determined for insurance coverage. Homeowner policies typically have replacement clauses in them and the cost of demolition, new construction and the added complexities of matching existing construction could exceed the cost of new construction.

Investment value is based on the income it can generate during its useful life. This value is dependent on what kind of yield an investor requires to capitalize the value over time. The formula for this is to divide net operating income by the capitalization rate required by the investor.

The assessed value of a home is used to determine the property taxes the owner must pay. This value is determined by the responsible state government agency.

Homeowners are generally most familiar with their home’s tax assessed value, and often are more familiar with their home’s probable market value than with its insurance replacement cost. Since market value may be lower than the replacement cost, owners should review the insured value with their property insurance agent periodically.

There can be a surprising difference in each of these separate values. It is important to know the purpose for which a value is going to be used.

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