If you ask "How much is my house worth?" I have two answers for you. First, if you don't really need to sell it, it is worth whatever you say it is. If you can honestly say, "I wouldn't sell this house for less than $300,000," then it is worth that much to you. Of course, if you need to sell it, what it is worth to you is entirely irrelevant.
Market value is the only relevant value once you are ready to sell. This is the value according to all the home buyers out there. They don't care what you spent renovating the house, or what you originally paid. Spend $50,000 adding a pool, and they may only pay $20,000 more for the home. Real estate is worth what the market says it is worth.
A True Story About Market Value
As a real estate agent, I once did what was then called a "comparative market analysis" for a young couple who were getting ready to sell their home. This is sometimes just called a "market analysis," a "selling price analysis," or something similar. It essentially consists of comparing the home to others that have recently sold in the area, to see what it should sell for.
I spoke to the couple, looked over the home and took my notes. I promised to return the next day. I carefully dug through the "sold" books (this was before everything was computerized) and found nearby homes that had sold within the last six months or so. I did my adjustments and all the other work that I had to do, and came up with a market value of $115,000.
"$115,000!" They blurted out in unison. I was sitting with them at their kitchen table, and I had all the papers with me. I showed them the "comps," or the listing information on homes that had sold. I felt that I did my homework well.
"But we paid $90,000 for the house two years ago and last year we put $40,000 into remodeling the kitchen!" Having perhaps a bit less tact than I have now, I politely explained that I took the kitchen into account. The kitchen was lovely, I assured them, and their $40,000 investment had probably raised the value of the home by $10,000. Neither a market analysis nor a formal appraisal can take into account the desires, feelings or expenditures of sellers.
They chose not to list with me. Normally in a case like this, the sellers then find a real estate agent with lots of patience or little business. That agent agrees to list the home for too much, hoping that one day the sellers will get desperate to sell, finally face reality, lower the price and take their lumps. The sellers often get frustrated waiting, and end up selling for even less than they would have gotten if they had priced it right to begin with.
What is market value? It isn't what you have into your house. It isn't what you feel it is worth. It is what the market will pay. How do you figure out what the market will pay? For single family homes, the most effective method is a comparative market analysis, whether done by a real estate agent or as part of a formal real estate appraisal. You can even learn to do this by yourself, but that is a topic for another article.