Did you ever walk into a home and think, this is just right? The colors are inviting, and the décor is pleasing. The home has a sense of order and comfortability. It makes you happy. This intangible factor is known as intrinsic value.
When I put a home on the market, prospective buyers will often call to schedule a showing. Some call me directly, and others call their real estate agent. Either way, the prospective buyer, and agent have an opinion about the home they are previewing. Typically, this is given in the form of written feedback, most commonly, email. I review the feedback and communicate it to the home seller.
I am often amazed at how different the feedback can be regarding the same home. Some rate it an 8 (out of 10) and some a 2? When asked about the price it can vary by tens of thousands of dollars. This condition holds true for both buyers and professional real estate agents.
So why the differences? Is it the difference in the buyer’s taste, practical needs or expectations at a certain value range? How about the professional real estate agents? Surely they would be grouped closer together in their opinions. Not so.
It is the difference in what makes each of us as individuals happy. This what’s known in the business as intrinsic value. It is an intangible when valuing homes or almost anything for that matter. It has more to do with what each of us covets and considers valuable. One thing for sure is that you will never see the phrase “intrinsic” as a value adjustment on a bank appraisal. The lender is only interested in the hard facts of what is value and what is not.
Something is said to have intrinsic value if it is good “in and of itself,” i.e., not merely as a means for acquiring something else. Happiness is an example of inherent, or intrinsic value because being happy is good just because it’s good to be happy, not because being happy leads to anything else. Get it!
Intrinsic value is one reason a 3,000 square foot home with granite counter tops, hardwood flooring and upgraded everything may sell faster and for a much greater price than the same style home in the same neighborhood without upgrades. In fact, it may sell for so much more that it does not appraise.
The buyer is likely to pay more because they are happy with the home and all the amenities. It made them feel good. Unfortunately, their lender is not going to live there, and the appraiser has no choice but to use the home with fewer goodies in the appraisal. What makes the bank happy is a different form of intrinsic value that has more to do with making a good investment that leads to their happiness.
The intrinsic nature of a home is a powerful thing. It is one of the main reasons that sellers believe their home is worth more than anyone else. They live there and have happy memories. They chose the décor, and we all have good taste…right? As a real estate professional, it is my job to assess the market value of a home. Overpricing the home may get me the listing but hurt the home’s ability to sell for a fair market price.
I often include the homeowner in the initial home price evaluation process. This practice not only educates the seller on how the market will react to their home but creates an understanding of home valuation principles. Afterward, we can consider the intrinsic value and how prospective buyers may feel when they see the home. In my opinion, the intrinsic value variable should not be the leading indicator of price. It should be the decision maker on whether to start at the top, middle or bottom of the home’s value range.
Intrinsic value is one of five evaluative measures I use when pricing a home. All of them are important when helping a seller acquire a ready, willing and able buyer for their property. Needless to say, it is, and will likely always be, the most unpredictable variable in pricing homes.
Knowledge is Power!
Jeffrey C. Hogue