How much is a one carat diamond worth? Anyone who has shopped for one knows that the price could have a significantly wide range of value. It’s been said that purchasers should consider the color, cut, clarity and carat size to compare stones but when it gets down to decision time, buyers still want to know “how much is it worth?”
Real estate valuation can be equally as confusing to the public. There are three commonly used tools that today’s home buyers rely on to make decisions but they vary significantly in the methods used to make the determination as well as the possible final consideration.
Appraisals are an opinion or estimate of value based on specific guidelines made by individuals who are licensed and possibly certified. Buyers and sellers may be reluctant to engage an appraiser because there is a fee of several hundred dollars that must be paid in advance even if no sale is ever consummated.
A Broker’s Price Opinion (BPO) as defined by the National Association of REALTORS® is an “estimate of the probable selling price of a property.” The Dodd-Frank Act describes a BPO as “an estimate…that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model.”
A Comparative Market Analysis (CMA) is a commonly used tool of salespeople to provide information to buyers and sellers to facilitate a sale. In most cases, it would be difficult to distinguish a CMA from a BPO because the steps considered are essentially the same and practitioners commonly use the terms interchangeably.
Another method called Automated Value Model (AVM) use software to search available data on the Internet to arrive at an approximation of value. Zestimates found on the Zillow site use this method. AVM’s may not consider all the market activity such as MLS sales and active listings. They can’t make adjustments based on location, improvements and condition that human experience and market knowledge provide.
For what it’s worth, a buyer or seller might want to acquire as much current and factual information as possible from a trusted real estate professional familiar with the market before making a decision on the largest single asset most people acquire.