Avoid being misled by inaccurate property valuations and find out what your house is really worth
Do you know how much your home is worth? If you are thinking of selling a property or remortgaging it, you’ll need to get a valuation. Knowing the value of your home will also help you work out whether you have positive or negative equity. But how exactly is the value of a property calculated, and how reliable is that information when it comes to selling? Here we’ll run through some of the myths about how people think properties are valued, and how they really are.
The value of your house is what somebody is willing and financially capable of paying for it. When you get a property ‘valued’, that is simply a guide to what price it might sell for on the open market, but it does not necessarily mean that’s what you will get for it. Unlike a product for sale in a shop or online store which has a fixed price label, the price a house is listed for is usually up for negotiation.
The market isn't static either. It will continually go up and down based on supply and demand, driven by things like the economy (which affects how much people can afford or are willing to pay), competition from other available properties, and how many people in the area want to live in a property like yours. These ups and downs can make it tricky to know how much your home is worth at any given time.
How most people think they can find out the value of their home:
An estate agent valuation
A good estate agent has excellent knowledge of the property market in their local area and is well positioned to know what they may be able to sell your property for. However, not all agents are created equal and there are factors at play that can distort what they tell you your home is worth. First, is competition for your business with other estate agents. When they are trying to win your business, they may just tell you what you want to hear and that they can sell your property for more than the next agent. Second, is that if their commission is based on the sale price, so it can be tempting for them to speculate and price it a lot more optimistically.
The asking price of other similar properties
For the reasons given above, the asking price at which a property is advertised is not a true representation of its value, which is only determined by its final selling price. A certain amount of haggling is to be expected with a property sale, and there’s often a bit of a buffer added on top of what the seller would accept to account for this. Even if a property listing is marked as sold subject to contract (STC) relatively quickly, never assume it has gone for the advertised price. You just don’t know the seller’s circumstances and they may have accepted a much lower offer for a quick cash sale. And even if a buyer has offered to pay the asking price, research suggests that between 25-30% of property sales in the UK fall through so the house could end up going back on the market at a lower price.
Online property valuations
Some websites, such as Zoopla and PropertyPriceAdvice claim to offer instant online property valuations or ‘house price calculators’. Valuations given by sites like these can be way off the mark and should never be relied upon for an accurate price. Results vary wildly, particularly if the site doesn’t ask for any other information than the property address, as there are simply too many variables that they don’t account for.
The amount you paid for it and/or have spent on it
As markets change over time, the price of your home today may not be the same as what you paid for it, and this doesn't always mean an increase. If markets take a downturn you may lose money and this can sometimes result in negative equity.
Spending a fortune on it, does not necessarily add value either. While some types of home refurbishments can add value to your property, most people decorate to their own needs and tastes and this often doesn’t make the place any more desirable for other people.
The reinstatement value (or rebuild cost)
When you take out home insurance, your insurer will ask for the reinstatement value so it knows what sort of liability it would face if the worst were to happen. However, this amount bears no resemblance to how much your home is actually worth because it doesn’t take into account the location of the land it’s built on.
How to find out the real value of your home:
The two best and most reliable ways to find out the value of your property are:
1. A Homebuyer Report by a RICS Surveyor
The Royal Institute of Chartered Surveyors (RICS) is the world’s leading professional body for qualifications in land and property and its members must follow a strict code of conduct when carrying out surveys. There are several types of surveys offered by RICS surveyors, but if you are looking for a valuation, you’ll want to go for a Level 2 survey – also known as a Homebuyer Report, which usually costs between £400 to £500.
This type of survey involves a detailed visual inspection of the property inside and out and provides an account of its condition and highlights any significant problems that might affect its value. The surveyor will also look at local market data and provide you with a valuation of what the property is worth on the open market. Although it is a report marketed at homebuyers, sellers can also have a survey done on their own home which can flag up any issues upfront and avoid nasty surprises after a sale has already been agreed.
Mortgage companies also use a surveyor for their valuations so they can check their client is paying fair market value, and that the property meets any special conditions that the lender requires. This is an important point because if they believe the house to be worth less than the agreed price, the mortgage company won’t lend on it, so even though someone is willing to pay that price, they are not financially capable, which leads back to the definition at the beginning of this article. When this happens, the sale can fall through (unless the buyer has more success with another lender) or the price will need to be renegotiated.
2. Recent sold prices of comparable properties on the Land Registry
If you want to know how much your home is worth but don’t want to pay for a surveyor’s valuation, the next best way to find out the value of a property is to look at what similar properties in the area have sold for recently. This method offers a fairly accurate indication of market value, providing there are comparable properties to benchmark against. However, since it bypasses an inspection by a qualified surveyor, it assumes you are comparing properties in a similar condition or that you can adjust the price accordingly.
You can find out how much any UK property actually sold for by looking it up on the Land Registry website. We prefer using Rightmove though, because it pulls in the Land Registry’s data and combines it with its own information about the property. That means you can see pictures and floorplans from when the house was on the market. This is very handy for seeing whether it had been extended and what condition it was in, which can shed some light on why properties on the same street might have sold for very different prices.
What qualifies as a comparable property?
For a property to be considered comparable in value to your own, it should meet the following conditions:
Sold maximum 12 months ago (the more recent the better)
Same area (within ¼ mile)
Same number of bedrooms
Same size (including whether extended or not)
Same type and style of house (eg. detached, semi, terraced)
Same condition (eg. state of repair, modern decoration, central heating etc)
What if there are no comparables?
If there are no similar properties to your own in the local area that have sold recently, you may need to loosen the criteria slightly to include properties further away, sold longer ago, or with more or fewer bedrooms. However, the more your home varies from the one you are comparing it to, the more you will have to make allowances in your estimate and the greater the margin for error will be.
Houses just a few streets apart can be significantly more or less desirable, so it helps if you know the area well when making comparisons. Other differences you might want to factor into your estimate are that houses with more bedrooms or an extension will usually increase the price, as will having clean, modern decor or a new kitchen. The style and type of house are important too. For example, an end of terrace house typically sells for more than a mid-terrace would, and properties that don’t look visually similar were most likely built at different times using different construction methods, so this can make a big difference to their value.
If the property sold more than a few months ago, you may also want to factor in changes in the market. There are various ways to find out whether prices in your area have gone up or down and by how much, including looking on the Land Registry database, and house price indexes from Halifax and Nationwide.
To be confident in the value of your property, it’s a good idea to use comparable sold house prices and check your findings with a RICS Homebuyer Report. There are of course no guarantees on the open market – as luck and timing will always play their part – but a valuation from a reliable source will set your expectations correctly and avoid you being misled only to end up with a house stuck on the market that won’t sell.