It is not the price you paid for the home plus improvements and real estate commissions.
It is not how much your friend, in-laws, attorney, accountant, sister with a real estate license, neighbor or anyone else thinks your house is worth unless they are willing to buy it at that price and you are willing to sell it at that price.
It is not what you paid for the home plus a needed or expected rate of appreciation. More specifically, the rate of appreciation you read in the newspaper, heard on TV, saw on Zillow or from some other source.
It is not more than what your neighbor’s house sold for because you simply like your house better.
It is not - perceived value - mortgage balance = amount needed for next home purchase.
I recommend you read Wikipedia's page on Real Estate Appraisal to give you a great understanding on how to estimate the value of real property today. In a nutshell there are three approaches to figuring out value - cost approach, sales comparison approach and income approach.
One of the biggest frustration Realtors deal with are clients who think their property is worth more than someone is willing to pay for it. When you see all of the properties for sale that expired without selling it is typically because of asking price. This might be an interesting read about that topic - Was it Price?
This method attempts to figure out market value by recreating the property. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements (structure).
Let's say you found a fabulous Sarasota beach home on Casey Key for $4,000,000 that you are thinking of buying. However, you notice that the lot next door is for sale at $1,000,000. Both lots are virtually the same. You also consulted with some builders and received estimates of around $1,500,000 to recreate the existing home that you are thinking of buying. All in all it would run you about $2,500,000 to recreate the same home but only newer. Does $4,000,000 sound a little pricey? It will to most.
Sales Comparison Approach
Most residential Realtors use the sales comparison approach to figure out the value of a home. You will often hear the word 'comps' or 'comparables' from your Realtor. This method is based on the principle of substitution. It assumes a knowledgeable buyer will pay no more for a property than it would cost to purchase a comparable substitute property.
For example, take a condo building like 888 in downtown Sarasota where the differences in condos are not typically substantial. All of the units face west with great water views, were built at the same time and have the same amenities. The only differences are the floors they are on, condition of the interior, floorplans and size. Assume there are three units in the building with the same floor plan for sale and are priced between $350,000 and $375,000. What are the chances a buyer is going to pick a different unit in the building priced at $500,000 if it is pretty much the same as the other three units? Unless the condition is dramatically different there is probably a very slim chance.
There are flaws with this method. Keep in mind that the sales approach takes into consideration recent sales. If prices are rising or falling quickly then sales that occurred 2 or 3 months ago can be outdated. Price adjustments need to made for when prices are on the move. For example, remember Sarasota real estate in 2005 when prices were shooting up? Homes were selling above recently sold similar homes. Remember in 2008 and 2009 when prices were falling quickly? Homes were selling below recently sold similar homes.
The income approach is not used much for residential Sarasota real estate. It is used in multi-family or commercial property appraisals. Income does play an important role in value when analyzing beach condos that is geared towards generating cash flow. With all else equal a Siesta Key condo that allows short term rentals will be more valuable than a condo that generates less rental income because of tighter rental restrictions.
Sarasota Market Value vs. County Assessed Just Market Value
A lot of people try to figure out a way of valuing property by looking at the Sarasota county tax assessed values. I have found that the relationship between what a property will sell for and what the county assesses the property for is too unreliable. I pulled 20 random sales that have occured in the last 30 days and compared the sales price with the county assessed value.
County Just Market Value
County Market Value/ Sales Price
825 Longboat Club Road
5109 Jungle Plum Road
1300 Ben Franklin #902
2185 Gulf of Mexico Dr. #221
800 N. Tamiami Trail #1801
1800 Ben Franklin #909
434 Meadow Lark Drive
646 Waterside Way
100 Central #G713
508 S Polk Drive
1750 Ben Franklin Drive
37 Sunset Drive #71
3721 Eagle Hammock Drive
1055 Peppertree Dr. #407
1100 Imperial Dr. #406
4702 Thomas Hoby Place
1393 Fraser Pine Blvd.
2708 Wisteria Place
1796 Cottonwood Trail
I divided the Sarasota county assessed just value by the price it sold for. Take a look at the percentages in the third column. They range from 50% up to 140%. Do you see any reliable correlation between the two numbers?
September 19th, 2017 Update
I originally wrote the article below about five years ago. It has received 15,761 views, so I thought it would be good to bring it back and update it a little bit. The methods of valuing property are still the same as they were 5 years ago. The only changes might be the online valuations from 3rd party websites like Zillow. These estimates can influence home owners, Realtors and buyers. You should read this article for more information on that subject - Zillow Inaccuracy - Part 1.
I am curious to see if the relationship between market value and assessed values are still unreliable. So I decided to compare for 20 recent sales.
Sarasota Market Value vs. County Assessed Just Market Value - 2017
County Market Value
County Market Value/ Sales Price
7858 Sanderling Road
1808 Casey Key Road
55 Lighthouse Point Dr
888 Blvd. of the Arts #801
5281 Cape Leyte Way
521 Bowsprit Lane
2564 Tom Morris Drive
3920 Elysian Woods Ln
5155 Flicker Field Cir
732 Eagle Point Dr
4698 Del Sol Blvd
3961 Spyglass Hill Rd.
5963 Midnight Pass Rd. #364
800 N. Tamiami Tr.
2024 Racimo Dr.
1990 Main Street #13
2703 Datura St
6533 Waterford Cir
2435 Gulf Gate Dr.
Looking at the deviation between actual sales price and Sarasota county assessed value for the twenty sales above shows an average of 75%, with a low of 54% and a high of 88%. This is a small sample size but it does look a little more reliable than when I did this five years ago.
I still believe the best way to value real property is the sales comparison approach. In other words, find some good similar properties that have recently sold and start there.