When calculating net worth, how do you value your house?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
Meg77
Posts: 2129
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: When calculating net worth, how do you value your house?

Post by Meg77 » Wed Sep 06, 2017 3:44 pm

I value my house (and rentals) at cost on my monthly net worth statements. When I make capital improvements (new HVAC, new flooring) then I add that to the cost. This makes it easy for me to track my cost basis over time, and it also keeps my net worth statement simpler so that I am not trying to guess at market values over time. At this point it's led to about a 10% discrepancy between my actual net worth (real value of RE) and what I have stated on my net worth statement, but I don't mind. I'm really trying to track how much difference I'm making to my net worth monthly, and inflating my net worth as RE increases in value would cloud that measurement anyway.
"An investment in knowledge pays the best interest." - Benjamin Franklin

WhyNotUs
Posts: 1138
Joined: Sun Apr 14, 2013 11:38 am

Re: When calculating net worth, how do you value your house?

Post by WhyNotUs » Wed Sep 06, 2017 3:52 pm

chevca wrote:
Wed Sep 06, 2017 3:38 pm

But let's be honest, once someone's net worth gets into the hundreds of thousands of dollars, they're just tracking it to make themselves feel good or for bragging rights. They have a pretty good handle on finances at that point and there's really no need to track net worth. Other than to use it to figure out how much umbrella insurance to carry, maybe.
Or because they have a number at which they have determined that they are financially independent and make life choices accordingly.
FI is goal and Net Worth is tracking mechanism to that goal.
I own the next hot stock- VTSAX

User avatar
greg24
Posts: 2908
Joined: Tue Feb 20, 2007 10:34 am

Re: When calculating net worth, how do you value your house?

Post by greg24 » Wed Sep 06, 2017 3:56 pm

I use my own rough estimate. I update that field in my spreadsheet infrequently.

alfaspider
Posts: 975
Joined: Wed Sep 09, 2015 4:44 pm

Re: When calculating net worth, how do you value your house?

Post by alfaspider » Wed Sep 06, 2017 4:12 pm

I had an appraisal done for a refi two years ago and just use that less the 7% transaction cost if I were to sell it. Zillow is not useful for my city (they admit as much), and I see little value in tracking on a monthly or even annual basis. I will revisit in a few years if the market seems to have changed drastically. One has to recognize that you are only going to get an estimate until you actually close.

As for why include- because it paints an reasonably accurate picture of my overall financial situation. If I wanted to sell everything tomorrow and move to a tropical Island, the idea is my net worth number woudl tell me if I could do it, and how comfortably. Or, if I lost my job and wanted to downsize my lifestyle, my net worth number tells me where I stand without income.

Net worth isn't always the best metric for evaluating one's personal situation. For example, you may have a high net worth but be facing a liquidity crisis. In that case, net worth may not tell the whole story. Likewise, when a company reports its results, it may use different metrics. For example, you could look at GAAP Income, EBITDA, or Free Cash flow in evaluating a company's quarterly performance. Different metrics tell you different things. Arguing that net worth should not include primary residence equity is like saying EBITDA should include taxes. The whole point of that metric is that it doesn't include things like taxes. If you want to include them, use a different metric for your evaluation.

chevca
Posts: 711
Joined: Wed Jul 26, 2017 11:22 am

Re: When calculating net worth, how do you value your house?

Post by chevca » Wed Sep 06, 2017 4:42 pm

WhyNotUs wrote:
Wed Sep 06, 2017 3:52 pm
chevca wrote:
Wed Sep 06, 2017 3:38 pm

But let's be honest, once someone's net worth gets into the hundreds of thousands of dollars, they're just tracking it to make themselves feel good or for bragging rights. They have a pretty good handle on finances at that point and there's really no need to track net worth. Other than to use it to figure out how much umbrella insurance to carry, maybe.
Or because they have a number at which they have determined that they are financially independent and make life choices accordingly.
FI is goal and Net Worth is tracking mechanism to that goal.
Fair enough. If there's a goal number trying to be reached, that would be a reason to track it. But, I would venture a guess many out there don't track it for that reason.

tim1999
Posts: 3329
Joined: Tue Dec 16, 2008 7:16 am

Re: When calculating net worth, how do you value your house?

Post by tim1999 » Wed Sep 06, 2017 5:35 pm

What similar houses nearby are actually selling for (sold price, not listing price), minus 7% for realtor commission and transfer taxes, minus mortgage balance.

gkaplan
Posts: 7034
Joined: Sat Mar 03, 2007 8:34 pm
Location: Portland, Oregon

Re: When calculating net worth, how do you value your house?

Post by gkaplan » Wed Sep 06, 2017 6:27 pm

I average the fair market value that Zillow, Redfin, and Home.com give.
Gordon

bklyn96
Posts: 113
Joined: Thu Apr 02, 2015 8:12 am

Re: When calculating net worth, how do you value your house?

Post by bklyn96 » Fri Sep 08, 2017 10:27 am

As you might already know, there's also NYC DOB public info that would be useful when you assess your neighbor's sale: the estimated cost of the renovations your neighbor made when the work permit was acquired.

You can review all your building's past work permits at: http://a810-bisweb.nyc.gov/bisweb/bispi00.jsp

One of the A2 jobs will be your neighbor's and it will have an "Estimated Cost" listed in the top right corner.

afan
Posts: 3019
Joined: Sun Jul 25, 2010 4:01 pm

Re: When calculating net worth, how do you value your house?

Post by afan » Fri Sep 08, 2017 12:25 pm

I include home value in networth, since that becomes important for estate planning.
We will probably sell and move when I retire, so at some point the value of the home does matter.

I used to average the values suggested by various sites. But I decided there was no reason to think this was more accurate. I watch zillow for its accuracy in my neighborhood. It wanders from amazingly good to amazingly bad. If I used more sites, I would have to watch more sites to have an opinion about accuracy.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

User avatar
bertilak
Posts: 5712
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: When calculating net worth, how do you value your house?

Post by bertilak » Fri Sep 08, 2017 2:36 pm

cadreamer2015 wrote:
Wed Sep 06, 2017 8:30 am
I don't usually think much about the value of my house in a net worth calculation - we've got to live somewhere.
I offset the equity in my home by the need for a place to live. Perfect balance!
Listen very carefully. I shall say this only once. (There! I've said it.)

KyleAAA
Posts: 6371
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: When calculating net worth, how do you value your house?

Post by KyleAAA » Fri Sep 08, 2017 3:51 pm

I take the average of redfin, zillow, and trulia and then multiply by 0.94 to account for liquidating value after commission. Good enough for my purposes.

MiddleOfTheRoad
Posts: 43
Joined: Fri Jul 21, 2017 11:19 am

Re: When calculating net worth, how do you value your house?

Post by MiddleOfTheRoad » Fri Sep 08, 2017 4:07 pm

If your networth approaches the estate tax limit for your state or the federal limit you better include your home in your NW calculation. Or you don't have to if you enjoy having your money go to tax instead of your heirs/charity of choice.

If you are just calculating NW to keep score/track progress then do whatever you feel best represent your situation.

letsgobobby
Posts: 10698
Joined: Fri Sep 18, 2009 1:10 am

Re: When calculating net worth, how do you value your house?

Post by letsgobobby » Fri Sep 08, 2017 4:45 pm

chevca wrote:
Wed Sep 06, 2017 4:42 pm
WhyNotUs wrote:
Wed Sep 06, 2017 3:52 pm
chevca wrote:
Wed Sep 06, 2017 3:38 pm

But let's be honest, once someone's net worth gets into the hundreds of thousands of dollars, they're just tracking it to make themselves feel good or for bragging rights. They have a pretty good handle on finances at that point and there's really no need to track net worth. Other than to use it to figure out how much umbrella insurance to carry, maybe.
Or because they have a number at which they have determined that they are financially independent and make life choices accordingly.
FI is goal and Net Worth is tracking mechanism to that goal.
Fair enough. If there's a goal number trying to be reached, that would be a reason to track it. But, I would venture a guess many out there don't track it for that reason.
it can be very important to track net worth for estate planning. unless you consider estate planning "bragging" or "making oneself feel good."

rec7
Posts: 2213
Joined: Tue Oct 28, 2008 7:22 pm
Location: ST LOUIS

Re: When calculating net worth, how do you value your house?

Post by rec7 » Fri Sep 08, 2017 7:14 pm

No I might save money living in my house but I can not use the money in the house. The only way I could use it is to downsize since I don't like to rent.
Disclaimer: You might lose money doing anything I say. Although that was not my intent. | Favorite song: Sometimes He Whispers Jay Parrack

Candor
Posts: 147
Joined: Sat May 28, 2011 4:25 pm

Re: When calculating net worth, how do you value your house?

Post by Candor » Fri Sep 08, 2017 7:40 pm

I guess when I paid off my house a few years ago with a lump sum of mid five figures or so my net worth magically decreased by that amount according to some. Maybe when I buy my next house I'll just finance it and instantly increase my net worth a few hundred thousand. 8-)

TN_Boy
Posts: 193
Joined: Sat Jan 17, 2009 12:51 pm

Re: When calculating net worth, how do you value your house?

Post by TN_Boy » Fri Sep 08, 2017 10:04 pm

letsgobobby wrote:
Fri Sep 08, 2017 4:45 pm
chevca wrote:
Wed Sep 06, 2017 4:42 pm
WhyNotUs wrote:
Wed Sep 06, 2017 3:52 pm
chevca wrote:
Wed Sep 06, 2017 3:38 pm

But let's be honest, once someone's net worth gets into the hundreds of thousands of dollars, they're just tracking it to make themselves feel good or for bragging rights. They have a pretty good handle on finances at that point and there's really no need to track net worth. Other than to use it to figure out how much umbrella insurance to carry, maybe.
Or because they have a number at which they have determined that they are financially independent and make life choices accordingly.
FI is goal and Net Worth is tracking mechanism to that goal.
Fair enough. If there's a goal number trying to be reached, that would be a reason to track it. But, I would venture a guess many out there don't track it for that reason.
it can be very important to track net worth for estate planning. unless you consider estate planning "bragging" or "making oneself feel good."
+1 to letsgobobby, there are valid reasons to understand net worth. It is not about bragging rights.

I'll mention the list for reasons to include home in your net worth, though for some reason, I cannot get bogleheads to acknowledge any of these points ... it baffles me, they are not unique to me, and recommended writers such as Jane Bryant Quinn make these points.
  • For estate planning, as noted above. The house is part of the estate, maybe a big part.
  • As a means to help pay for long term care, via downsizing, a reverse mortgage, or a sale followed by move to retirement community. Given the periodic questions about "do I need LTCI" it's puzzling to me people don't consider home value/their net worth when doing retirement planning
It baffles me how people contort themselves to avoid including their home value in net worth. It's sitting there, low to mid six figures for most people. I'm not speaking as someone whose home is a huge part of their net worth; we expect to fund retirement with SS, savings, etc. But in our area the equity in our house would pay for at least three years in assisted living for one person (actually, probably close to four years). Or it would more than cover the down payment to move into a continuing care community. Or should LTC or some other financial debacle occur that challenged our savings/investments, a reverse mortgage could get us access to a decent amount of money while staying in the house.

NET1
Posts: 17
Joined: Fri Aug 02, 2013 7:29 pm

Re: When calculating net worth, how do you value your house?

Post by NET1 » Fri Sep 08, 2017 10:25 pm

We take the Zillow value and subtract 15-20%. Helps account for realtor fees, comp/pricing inaccuracies, and repair costs that might be necessary when getting the house ready for sale. We pay less attention to net worth each year and focus more on invested assets & cash as we'll always need a place to live.

goingup
Posts: 2838
Joined: Tue Jan 26, 2010 1:02 pm

Re: When calculating net worth, how do you value your house?

Post by goingup » Sat Sep 09, 2017 8:27 am

TN_Boy wrote:
Fri Sep 08, 2017 10:04 pm
I'll mention the list for reasons to include home in your net worth, though for some reason, I cannot get bogleheads to acknowledge any of these points ... it baffles me, they are not unique to me, and recommended writers such as Jane Bryant Quinn make these points.
It's really not the majority of Bogleheads who torture the definition of net worth. The definition is incontrovertible but there is a contingent of folks who insist on their own home brewed recipe. Frankly, it's a head-scratcher. :confused

Candor
Posts: 147
Joined: Sat May 28, 2011 4:25 pm

Re: When calculating net worth, how do you value your house?

Post by Candor » Sat Sep 09, 2017 9:46 am

A great quote by Daniel Patrick Moynihan comes to mind while reading this thread.

Ron Ronnerson
Posts: 751
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: When calculating net worth, how do you value your house?

Post by Ron Ronnerson » Sat Sep 09, 2017 10:26 am

I use the price similar homes sell for. Over the years, Zillow has provided a decent estimate for our home but has probably underestimated a bit some years and overestimated other years.

mountaingoatcos
Posts: 7
Joined: Sat Aug 19, 2017 5:11 pm

Re: When calculating net worth, how do you value your house?

Post by mountaingoatcos » Sat Sep 09, 2017 11:49 am

We use Airbnb for part of the house and value it as net income before taxes÷2.5 as that is how much I would have in a CD to earn the same income. It is pretty close to the Zillow value, incidentally.

User avatar
FraggleRock
Posts: 232
Joined: Sun Feb 12, 2017 6:50 pm

I don't

Post by FraggleRock » Sat Sep 09, 2017 12:49 pm

At zero$.
We have to live somewhere.
You ask me my net worth and I will reply with the sum of: stocks, bonds, cash.
No car. No house.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: I don't

Post by avalpert » Sun Sep 10, 2017 9:09 pm

FraggleRock wrote:
Sat Sep 09, 2017 12:49 pm
At zero$.
We have to live somewhere.
You ask me my net worth and I will reply with the sum of: stocks, bonds, cash.
No car. No house.
You don't have to live in your current house and if you have $0 elsewhere but (relatively) significant value in your house you would probably be a fool to not consider it as part of your assets and re-evaluate if you aren't spending too much on housing relative to your other needs.

All hiding it does is make it more difficult to make rational decisions.

User avatar
abuss368
Posts: 11886
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: I don't

Post by abuss368 » Sun Sep 10, 2017 9:37 pm

FraggleRock wrote:
Sat Sep 09, 2017 12:49 pm
At zero$.
We have to live somewhere.
You ask me my net worth and I will reply with the sum of: stocks, bonds, cash.
No car. No house.
I agree. As the years have gone on, we don't include vehicles, kids college funds, or the HSA account. I stopped calculating or including home equity. Most financial applications or agreements may say Net Worth excluding home equity.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

MrNewEngland
Posts: 693
Joined: Sun Sep 28, 2014 11:38 am

Re: When calculating net worth, how do you value your house?

Post by MrNewEngland » Mon Sep 11, 2017 8:55 am

Candor wrote:
Fri Sep 08, 2017 7:40 pm
I guess when I paid off my house a few years ago with a lump sum of mid five figures or so my net worth magically decreased by that amount according to some. Maybe when I buy my next house I'll just finance it and instantly increase my net worth a few hundred thousand. 8-)
I was just going to come here and say something similar. I just sold my house and I'm using about $40k of the proceeds to refi & pay down the mortgage of the condo I am living in to get my payments down. Does my net worth suddenly drop my $40K when I refinance?

The idea that the value of your house isn't included in net worth makes no sense to me.

Flashes1
Posts: 812
Joined: Wed May 07, 2008 7:43 am

Re: When calculating net worth, how do you value your house?

Post by Flashes1 » Mon Sep 11, 2017 10:28 am

Since something is worth only what someone will pay for it: I use comps from what similar homes have recently sold for in my neighborhood MINUS a 6% realtor commission.

Admiral
Posts: 912
Joined: Mon Oct 27, 2014 12:35 pm

Re: When calculating net worth, how do you value your house?

Post by Admiral » Mon Sep 11, 2017 11:08 am

Just because something is not immediately liquid doesn't mean it has no value. That's why we have markets (stock, real estate, autos): to tell us what things should be worth at any given moment.

If you would not use your home equity (estimated value - mortgage balance) in your net worth calculation, then by the same token you should not use your stocks, either, because they are just numbers on a computer screen...and these numbers may drop by half tomorrow. Or my $1 share of Widgetco may be worth a nickel, or ten dollars.

But, here is a real-world example of why it can be tricky when it comes to real estate:

I have a home in [Key West, Naples, Marco Island] that, last week, I owned outright. It was "worth" $1m, according to Zillow. But, I did not have flood insurance. Or, I didn't have enough.

Today, that $1m home is "worth" a lot less. Maybe it's not zero, since land has value, not just structures. But, the value of my assets has decreased.

Here's a similar example, but with stocks.

Let's say last week I owned $1m in shares of Insurer X, a company that last week had a stock price of $10. Today, after paying out all their flood claims, the company becomes insolvent and has declared bankruptcy and the share are now worthless.

Is there a material difference, to me?

User avatar
DaftInvestor
Posts: 3220
Joined: Wed Feb 19, 2014 10:11 am

Re: When calculating net worth, how do you value your house?

Post by DaftInvestor » Mon Sep 11, 2017 11:23 am

In the rare times that I calculate my NW (my focus is usually on either college saving or retirement savings; NW is somewhat irrelevant in my opinion) I just look at Zillow and round down to the nearest 100K

TN_Boy
Posts: 193
Joined: Sat Jan 17, 2009 12:51 pm

Re: I don't

Post by TN_Boy » Mon Sep 11, 2017 12:41 pm

FraggleRock wrote:
Sat Sep 09, 2017 12:49 pm
At zero$.
We have to live somewhere.
You ask me my net worth and I will reply with the sum of: stocks, bonds, cash.
No car. No house.
FraggleRock (and others with the same viewpoint),

I'm genuinely curious, of the arguments advanced above about why you need to think about your housing as part of your net worth, do you find those arguments totally incorrect, unconvincing, or simply irrelevant?

Here is a current thread where the equity in a house might be used as part of paying for long term care:

viewtopic.php?f=1&t=227384&newpost=3527 ... ead#unread

You have to live somewhere. It might not be where you think.

User avatar
FraggleRock
Posts: 232
Joined: Sun Feb 12, 2017 6:50 pm

Can I really plan ahead for 20+ years?

Post by FraggleRock » Mon Sep 11, 2017 9:27 pm

TN_Boy wrote:
Mon Sep 11, 2017 12:41 pm
I'm genuinely curious, of the arguments advanced above about why you need to think about your housing as part of your net worth, do you find those arguments totally incorrect, unconvincing, or simply irrelevant?
Irrelevant in that the earliest projected sell date of our house (to move to the old folks home) is 27 years from now.
It has no impact on asset distribution and spending plans for 20+ years.

mchriton
Posts: 50
Joined: Sat Oct 24, 2015 3:26 pm

Re: When calculating net worth, how do you value your house?

Post by mchriton » Mon Sep 11, 2017 10:06 pm

I find these discussions on net worth calculations confusing. Net worth is legally defined as including home equity. There is no fuzz on this.

Definition references:
* https://www.merriam-webster.com/legal/net%20worth
* IRS considers net worth as inclusive of home equity. For example, IRS Form 8854 at https://www.irs.gov/pub/irs-pdf/f8854.pdf . There is a worksheet on page 5: schedule A that shows how IRS calculates net worth which includes home equity.

Is there any source of legal significance where net worth is defined without being inclusive of home equity? I haven't seen any.

It’s fine if you don’t see value in the net worth and want to use something else. But please don’t use the net worth terminology for something that isn't net worth. Net investable assets or retirement savings is a fine metric to use in some scenarios. For some folks net worth is a key metric (moving from VHCOL to LCOL for retirement; estate planning; etc), if you plan to stay in the house for next few decades it could be less useful.

User avatar
Sunny Sarkar
Posts: 2417
Joined: Fri Mar 02, 2007 1:02 am
Location: Flower Mound, TX
Contact:

Re: When calculating net worth, how do you value your house?

Post by Sunny Sarkar » Mon Sep 11, 2017 10:19 pm

coinflip wrote:
Wed Sep 06, 2017 8:24 am
Do you use purchase price, appraisal value, property assessment, Zillow's Zestimate, or something else?
Not in favor of including primary home's equity in net worth calculation - can't sell part of the house to pay for an emergency. Gotta live somewhere.
"Cost matters". "Stay the course". "Press on, regardless". ― John C. Bogle

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: When calculating net worth, how do you value your house?

Post by avalpert » Mon Sep 11, 2017 10:20 pm

mchriton wrote:
Mon Sep 11, 2017 10:06 pm
Is there any source of legal significance where net worth is defined without being inclusive of home equity? I haven't seen any.
Definition of an Accredited Investor based on net worth excludes primary residence

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: When calculating net worth, how do you value your house?

Post by avalpert » Mon Sep 11, 2017 10:21 pm

Sunny Sarkar wrote:
Mon Sep 11, 2017 10:19 pm
coinflip wrote:
Wed Sep 06, 2017 8:24 am
Do you use purchase price, appraisal value, property assessment, Zillow's Zestimate, or something else?
Not in favor of including primary home's equity in net worth calculation - can't sell part of the house to pay for an emergency. Gotta live somewhere.
Can rent/buy a place anywhere, you can't sell parts of shares either - so what?

mchriton
Posts: 50
Joined: Sat Oct 24, 2015 3:26 pm

Re: When calculating net worth, how do you value your house?

Post by mchriton » Mon Sep 11, 2017 10:31 pm

avalpert wrote:
Mon Sep 11, 2017 10:20 pm
mchriton wrote:
Mon Sep 11, 2017 10:06 pm
Is there any source of legal significance where net worth is defined without being inclusive of home equity? I haven't seen any.
Definition of an Accredited Investor based on net worth excludes primary residence
That reference actually supports the legal definition. See https://en.wikipedia.org/wiki/Accredite ... ted_States

Ref: "In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence"

The metric they're using is "net worth excluding primary residence". They're using the standard definition of "net worth" which is inclusive of home equity and then adding on a formula to take it away.

Having metrics such as "net worth excluding primary residence" , "net investable assets", "retirement assets" is consistent with legal definitions, just don't call them "net worth"
Last edited by mchriton on Mon Sep 11, 2017 11:01 pm, edited 2 times in total.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: When calculating net worth, how do you value your house?

Post by avalpert » Mon Sep 11, 2017 10:56 pm

mchriton wrote:
Mon Sep 11, 2017 10:31 pm
avalpert wrote:
Mon Sep 11, 2017 10:20 pm
mchriton wrote:
Mon Sep 11, 2017 10:06 pm
Is there any source of legal significance where net worth is defined without being inclusive of home equity? I haven't seen any.
Definition of an Accredited Investor based on net worth excludes primary residence
That reference actually supports the legal definition. See https://en.wikipedia.org/wiki/Accredite ... ted_States

Ref: "In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence"

The metric they're using is "net worth excluding primary residence". They're using the standard definition of "net worth" which is inclusive of home equity and then adding on a formula to take it away.

Having metrics such as "net worth excluding primary residence" , "net investable assets", "retirement assets" is consistent with legal definitions, just don't call them "net worth"
That's not how it is described in the regs.
(5) Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000.

(i) Except as provided in paragraph (a)(5)(ii) of this section, for purposes of calculating net worth under this paragraph (a)(5):

(A) The person's primary residence shall not be included as an asset;
Seriously, this isn't really relevant to the broader question of whether including real estate in your net worth is the right thing to do - but rather than acknowledge that I provided you with an example where the law uses 'net worth' in a way that excludes home equity you try and make a hermenutical exegesis of Wikipedia's entry when a simple look at the legal definition should have satiated your curiosity.

mervinj7
Posts: 371
Joined: Thu Mar 27, 2014 3:10 pm

Re: When calculating net worth, how do you value your house?

Post by mervinj7 » Mon Sep 11, 2017 11:13 pm

Sunny Sarkar wrote:
Mon Sep 11, 2017 10:19 pm
coinflip wrote:
Wed Sep 06, 2017 8:24 am
Do you use purchase price, appraisal value, property assessment, Zillow's Zestimate, or something else?
Not in favor of including primary home's equity in net worth calculation - can't sell part of the house to pay for an emergency. Gotta live somewhere.
A cash out refinance or reverse mortgage does allow you to pull equity out of a home if you needed the cash. Not always optimal but it can be done.

mchriton
Posts: 50
Joined: Sat Oct 24, 2015 3:26 pm

Re: When calculating net worth, how do you value your house?

Post by mchriton » Tue Sep 12, 2017 12:03 am

avalpert wrote:
Mon Sep 11, 2017 10:56 pm
Seriously, this isn't really relevant to the broader question of whether including real estate in your net worth is the right thing to do - but rather than acknowledge that I provided you with an example where the law uses 'net worth' in a way that excludes home equity you try and make a hermenutical exegesis of Wikipedia's entry when a simple look at the legal definition should have satiated your curiosity.
What is the broader question? There are two points of contention in this thread:

1.) Terminology - whether net worth is defined as inclusive or exclusive of primary residence (see many of the first comments on this thread).
2.) Planning - what metric is best used for planning purposes (e.g.: net worth vs net investable assets)

It's hard to get to #2 without using the same language :(

For #1, I think too much time has been spent arguing on terminology. I haven't seen anything that disputes definition at https://www.merriam-webster.com/legal/net%20worth which defines NW as inclusive of primary residence. The regs you linked to are interesting, thanks! My read of the them is aligned with the wikipedia summary, that is the calculation and metric produced is "net worth excluding primary residence" (to summarize the four bullets in the regs).

TravelforFun
Posts: 899
Joined: Tue Dec 04, 2012 11:05 pm

Re: When calculating net worth, how do you value your house?

Post by TravelforFun » Tue Sep 12, 2017 12:18 am

Of course the equity of your home should be included in your net worth calculations. If you owed $200,000 on your home and you withdrew $200,000 from your investment to pay off your home, your net worth shouldn't be down $200,000 in one day; you would have $200K less in investable assets but $200K more in your home equity.

User avatar
randomizer
Posts: 721
Joined: Sun Jul 06, 2014 3:46 pm

Re: When calculating net worth, how do you value your house?

Post by randomizer » Tue Sep 12, 2017 12:24 am

I use the purchase/appraisal price. The house is not a very liquid asset, so I don't mind if the figure it a little "stale". I also look at price indexes for the area on a yearly basis to get a rough idea of how the value is probably evolving.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: When calculating net worth, how do you value your house?

Post by avalpert » Tue Sep 12, 2017 7:15 am

mchriton wrote:
Tue Sep 12, 2017 12:03 am
avalpert wrote:
Mon Sep 11, 2017 10:56 pm
Seriously, this isn't really relevant to the broader question of whether including real estate in your net worth is the right thing to do - but rather than acknowledge that I provided you with an example where the law uses 'net worth' in a way that excludes home equity you try and make a hermenutical exegesis of Wikipedia's entry when a simple look at the legal definition should have satiated your curiosity.
What is the broader question? There are two points of contention in this thread:
1.) Terminology - whether net worth is defined as inclusive or exclusive of primary residence (see many of the first comments on this thread).
2.) Planning - what metric is best used for planning purposes (e.g.: net worth vs net investable assets)
I'd say that captures the broader question, but you are the one who introduced definitions of legal significance - a category that very often will deviate from common usage and even consistent usage across the law. I showed you that there is a legal definition of significance that explicitly defines 'net worth' as excluding primary residence. You then twist yourself in knots to say the regs aren't defining 'net worth' (despite literally saying 'for purpose of calculating net worth', not for purpose of calculating 'net worth excluding primary residence') rather than just acknowledge there is a legal definition out there that does so. I could have thrown in other regulatory definitions that were similar (VA's definition for the purpose of calculating it also excluding primary residences on less than 2 acres of land - I believe they scrapped net worth as a criteria altogether a couple of years ago).

Soon2BXProgrammer
Posts: 316
Joined: Mon Nov 24, 2014 11:30 pm

Re: When calculating net worth, how do you value your house?

Post by Soon2BXProgrammer » Tue Sep 12, 2017 7:32 am

Just a reminder, real estate commissions can be killer... i would recommend that you value your house at 94% (or some other number) of the "value" that you come up with.

Flashes1
Posts: 812
Joined: Wed May 07, 2008 7:43 am

Re: When calculating net worth, how do you value your house?

Post by Flashes1 » Tue Sep 12, 2017 7:33 am

I can't believe we're even having this discussion. Anyone with a day of financial/accounting experience knows Net Worth is Assets - Liabilities. To argue otherwise is ignorant. If you want to exclude home equity in your personal situation, fine, just don't call it your Net Worth----call it something like Investable Assets.

mnnice
Posts: 242
Joined: Sat Aug 11, 2012 5:48 pm

Re: When calculating net worth, how do you value your house?

Post by mnnice » Tue Sep 12, 2017 8:11 am

I suspect part of the reason people want to exclude home value is their emotional attachment to their home.

Personally, my situation was different. I bought a home with cash that I really would have preferred not to buy. I needed to be in a particular school district and there were pretty much no rentals to be had. When we "age out" of personally having kids in k12 we will likely move.

If I rented I would have the SWR of the proceeds of the house plus no property taxes and cheaper renters vs homeowners insurance. This amount would produce an exceptable housing budget IMO.

Also our house is only 10-12% of the total. I don't feel much richer with it included or poorer without it included :D

TN_Boy
Posts: 193
Joined: Sat Jan 17, 2009 12:51 pm

Re: When calculating net worth, how do you value your house?

Post by TN_Boy » Tue Sep 12, 2017 8:56 am

mervinj7 wrote:
Mon Sep 11, 2017 11:13 pm
Sunny Sarkar wrote:
Mon Sep 11, 2017 10:19 pm
coinflip wrote:
Wed Sep 06, 2017 8:24 am
Do you use purchase price, appraisal value, property assessment, Zillow's Zestimate, or something else?
Not in favor of including primary home's equity in net worth calculation - can't sell part of the house to pay for an emergency. Gotta live somewhere.
A cash out refinance or reverse mortgage does allow you to pull equity out of a home if you needed the cash. Not always optimal but it can be done.
Or a HELOC. There are lots of ways to use the equity in one's house. Most of them would not be my first choice of funding -- but the option is there. Sort of like an emergency fund; you'd rather not use it, but you know its there ... and how big it is ..... if you track that sort of thing ....

For non-emergency uses, a HELOC can sometimes be used to avoid a contingency sale when you are buying another house.

TN_Boy
Posts: 193
Joined: Sat Jan 17, 2009 12:51 pm

Re: When calculating net worth, how do you value your house?

Post by TN_Boy » Tue Sep 12, 2017 9:01 am

mnnice wrote:
Tue Sep 12, 2017 8:11 am
I suspect part of the reason people want to exclude home value is their emotional attachment to their home.

Personally, my situation was different. I bought a home with cash that I really would have preferred not to buy. I needed to be in a particular school district and there were pretty much no rentals to be had. When we "age out" of personally having kids in k12 we will likely move.

If I rented I would have the SWR of the proceeds of the house plus no property taxes and cheaper renters vs homeowners insurance. This amount would produce an exceptable housing budget IMO.

Also our house is only 10-12% of the total. I don't feel much richer with it included or poorer without it included :D

In addition to your reason, I think when people consider retirement funding, they correctly plan on using their investable assets + SS + pensions to fund spending. Use of the home equity tends to be a later stage situation (downsizing, LTC, or a financial disaster). Though I mention one situation above where a HELOC might be useful in a non-emergency situation. It's wise to know your net worth, rather than ignore it.

10YearPlan
Posts: 191
Joined: Tue Dec 22, 2015 2:58 pm

Re: When calculating net worth, how do you value your house?

Post by 10YearPlan » Tue Sep 12, 2017 9:09 am

Flashes1 wrote:
Tue Sep 12, 2017 7:33 am
I can't believe we're even having this discussion. Anyone with a day of financial/accounting experience knows Net Worth is Assets - Liabilities. To argue otherwise is ignorant. If you want to exclude home equity in your personal situation, fine, just don't call it your Net Worth----call it something like Investable Assets.
Agreed. For what it is worth, I understand the desire to EXCLUDE home value from calculations because it is illiquid and values can be a bit squishy. BUT, that is why I do a separate calculation on Investable Assets. I see them as two different things, both worthy of calculation tracking.

Admiral
Posts: 912
Joined: Mon Oct 27, 2014 12:35 pm

Re: When calculating net worth, how do you value your house?

Post by Admiral » Tue Sep 12, 2017 9:24 am

If you don't think your home should be valued as an asset that can be exchanged for currency, I suggest calling your insurance company and telling them you want to cancel your policy. Or do the same thing with your mortgage co. I think they'd give you an argument. :wink:

User avatar
nisiprius
Advisory Board
Posts: 34361
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: When calculating net worth, how do you value your house?

Post by nisiprius » Tue Sep 12, 2017 9:32 am

I've never understood why I'd need to know my net worth, other than to feel smug or to convince some advisory services to let me pay them fees. What's it good for, exactly?

But, sure, I've calculated my net worth from time to time. Our local laws require that houses be assessed at their full value, so I've just used the assessed value on the real estate tax bill. Nowadays I guess I might also consider using Zillow. In the years when I hadn't paid off my mortgage, I always treated what was owing on my mortgage is negative net worth, i.e. I always deducted major debts from my net worth.

It's never happened, but if someone needed to know my net worth and I wanted to tell them, I'd just ask them how they wanted it calculated.

Sure, my house has a dollar value but there's no way to find out what it is except to sell it and see what someone will pay for it. It's highly illiquid, and it can't be bought or sold fractionally, it can't be rebalanced, and we need it to live in. It's not an investment, it's shelter. Just because you can assign a dollar value to something as some kind of bull-session thought experiment doesn't mean it's a sensible thing to do. Why does it make sense to include the number of dollars you think you might get for your house if you sold it, when you aren't going to sell it, in your net worth... and not include the net present value of your future earned income?
Last edited by nisiprius on Tue Sep 12, 2017 9:37 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
DaftInvestor
Posts: 3220
Joined: Wed Feb 19, 2014 10:11 am

Re: When calculating net worth, how do you value your house?

Post by DaftInvestor » Tue Sep 12, 2017 9:37 am

Glances through this thread - what's interesting is that I don't think (unless I missed it) anyone asked the OP what his/her/their "Purpose" of calculating networth is. The answer certainly depends upon the goal on whether or not it should be included.

Post Reply