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
avalpert
Posts: 5683
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 9:58 am

TN_Boy wrote:
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.
I think those two reasons are connected - if they weren't emotionally attached to the house they would recognize that the asset value of the house is funding part of their housing expenses in retirement and they could rationally evaluate if the housing they are getting from the use of those assets is worth the cost. I think a lot of the pushback is people who don't want to think about their true housing expenses when so they compartmentalize it.

book lover
Posts: 57
Joined: Thu Aug 23, 2012 4:01 pm

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

Post by book lover » Tue Sep 12, 2017 10:01 am

We do it both ways: however, our house is a small percentage of overall net worth so it does not change the numbers much.

avalpert
Posts: 5683
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 10:04 am

nisiprius wrote:
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?
Estate planning, determining available assets for long-term care/end-of-life care situations, securing loans (like your mortgage), having a full picture of your financial situation. I can think of lot's of things it is good for.
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?
Because one is an asset you actually own and one is a projection of what might happen in the future. It's like asking why include the number of dollars you think you might get for your mutual fund and not the net present value of your future earned income...

And I think the assumption 'you aren't going to sell it' is begging the question - without looking at the alternative uses from the proceeds of selling the asset you don't have a basis for assuming that and doing so may be leading to suboptimal financial (and well-being) decisions.

10YearPlan
Posts: 176
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 10:04 am

Oh, to answer the OP's question, I value the house with an official appraisal we received. It is several years old now, and likely not 100% accurate as a result, but it seems to be more reliable than Zillow. I do not "discount" for anticipated future sales costs/commissions, etc.

avalpert
Posts: 5683
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 10:06 am

DaftInvestor wrote:
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.
The second response (and several more after that) asked why they want to calculate it:
cadreamer2015 wrote:
Wed Sep 06, 2017 8:30 am
I guess I would ask first why you are doing a net worth calculation in the first place? Just to keep score, or is there some other reason?

User avatar
bertilak
Posts: 5568
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 » Tue Sep 12, 2017 10:12 am

DaftInvestor wrote:
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.
Good question.

The section this is in, "Personal Finance (Not Investing)" can give us a clue -- it may NOT be for the purpose of establishing an investment portfolio AA. It is for AA purposes that I don't think a home value should be considered. If you are calculating the value of an estate (e.g. for will or trust purposes, etc.) then the value of a home is pertinent and how to establish that value is a good question, with a bunch of possibilities listed above.
Listen very carefully. I shall say this only once. (There! I've said it.)

Admiral
Posts: 756
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 10:33 am

How is owning a house any different than owning any other real estate...which we DO consider when we calculate our assets and net worth. The house is simply an improvement to the raw land, adding to its value, up to the market price.

If I bought a 2 acre parcel of lakefront property for $10 and now I can sell it for $1 million dollars, would you say that I should not include that parcel in my net worth? If not, then why not? If a bank will give me a loan secured by it--or an individual will buy it from me--then it's quite apparent that it has intrinsic, monetary value and should be counted as part of my net worth.

AnonJohn
Posts: 74
Joined: Wed Oct 07, 2015 2:45 pm

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

Post by AnonJohn » Tue Sep 12, 2017 2:23 pm

Along the lines of other suggestions, I use a discounted Zestimate (zestimate *.8). I think this aligns best with local sales I saw as very comparable over the years. I also like the earlier suggestion of using the low end of the range. Pretty similar, I'd bet.

I think it's relevant to include. For me, a storytelling approach drives it home. I had to decide between a 20 year mortgage refinance and a 15 year one. I don't get the satisfaction of the 15 year mortgage savings if I neglect home equity in net worth. For my "other" net worth and savings rate would surely be higher under a 20 year mortgage.

There's a practical dimension too. I live in a HCOL area. I could sell and buy outright in other areas of the country. Factors into future planning and thinking about income requirements and opportunities.

baliktad
Posts: 16
Joined: Sun Mar 26, 2017 12:13 pm

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

Post by baliktad » Tue Sep 12, 2017 6:36 pm

Net worth is a financial term which originates in business accounting. To understand how to calculate net worth, we must understand what the purpose of this measurement is. Business accounting has two purposes:
  1. inform managers of the business the current state of the business, so that they may make better decisions to improve the business' future
  2. inform investors in the business the current state of various business, so that they may accurately compare investment opportunities to each other
The standardized definition of net worth (assets minus liabilities) has value to each of these parties:
  1. Managers can compare the net worth of the business over time to see whether the business is expanding, shrinking, or staying flat. This allows management to evaluate the effect of certain decisions: devoting more or less resources to products, wages, or capital improvements. If any part of the business were excluded, this would lead to managers making poorer decisions. For example, if the value of a business' physical headquarters were arbitrarily excluded from its net worth ("we can't operate without a place of business, so I'll just choose to ignore the value of this building!"), an owner would be incentivized to mortgage the property to the hilt at almost any interest rate, because the effect would be to produce usable cash without consequence. A more informed manager understands that taking out a loan against an asset might provide cash flow but does not alter net worth.
  2. Investors can compare the net worth of various businesses at a given point in time to be able to make sound investment decisions. Although Bogleheads place a strong emphasis on passive investing, we should not ignore the fact that passive investing relies on active investors to judge the state of a business and determine what its value is - which judgement can only come from comparable reports. Imagine not being able to compare the P/E ratios of various companies because each company has decided to calculate their financials in a different way! In the US, we have formalized principles (GAAP) that instruct companies how to produce accurate and comparable financial reports, as a means of assisting investors in making informed decisions.
Now, when we apply these business accounting principles to our own personal lives, we should be aware that the goal of a business and the goal of a person or family are different. A business exists to make money for its investors, so decisions on how to operate the business always come back to their effect on the balance sheet. A person has many more goals than to just make money: you might say a person's goal is to maximize happiness, which is only partially dependent on finances.

So what is the purpose of a net worth calculation to a individual? Similar to a business' use of the term, net worth is a concept that can help us:
  1. manage our own financial resources. You are your own CFO! By calculating one's own net worth over time, we can accurately judge the effects of our financial decisions. Acknowledging the financial value of one's own primary residence can help make decisions like whether to sell or rent when it comes time to move, whether it's worth it to add-on/improve the property, and what resources to make use of in the event of financial distress. Would you make the same decisions if mineral deposits were discovered on your property that increased its value tenfold? Or a zoning change allowed a casino to open up next door? What if the state is considering declaring eminent domain over your neighborhood to construct a freeway? If those things would affect your financial decisions, then it is useful for you to track your home's value as part of your net worth.
  2. accurately communicate regarding our current financial state with one another. As has been pointed out several times above, this is a financial discussion forum, and we expect to be able to communicate clearly with each other. This means agreeing on definitions and terminology. Your net worth will form the basis of your conversations with any financial advisor, tax or estate planner. And your net worth (inclusive of your home value) certainly matters when choosing the level of risk you are willing to take on with your other financial resources, so it's useful to include home value in net worth conversations here on the BH forums.
All of this is not to say that net worth is the only number, or even the primary number worth tracking. As has been pointed out by several others above, there is value to understanding the value of all liquid assets, net investable assets, tax-advantaged assets, and many more. You can decide that net worth doesn't need to be examined frequently, or that you will stay in your house regardless of what happens to your other investments. But you cannot and should not ignore your actual net worth, inclusive of all meaningful property, particularly on a forum such as this one dedicated to discussion of finances and investments.


As to the actual question at hand: I take the number Redfin gives me at face value, as it's not worth putting much more effort into getting a more accurate estimate until I'm ready to sell. In my experience, it's only really the very leftmost number that matters when looking at my overall portfolio.

SeaToTheBay
Posts: 28
Joined: Thu Jun 08, 2017 6:11 pm

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

Post by SeaToTheBay » Tue Sep 12, 2017 6:58 pm

I average Zillow and Redfin (both actually seem fairly accurate given the comps here), then subtract the principal owed on our mortgage.

simas
Posts: 42
Joined: Wed Apr 04, 2007 5:50 pm

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

Post by simas » Tue Sep 12, 2017 7:13 pm

"Now, when we apply these business accounting principles to our own personal lives, we should be aware that the goal of a business and the goal of a person or family are different."

Yep. and that is the end to the whole conversation of why we "should" do this or that because someone , somewhere, in completely different situation does it.

really, who cares? why so much religion about this? track whatever you want to track, clothes on your back, your furniture, your <whatever> collection, present value of future wages, the value of the lottery win you are sure to get, incoming inheritance, basically whatever you want. you do not have to justify it to anyone or feel like you have to do defend it in front of the anyone...

miles monroe
Posts: 1123
Joined: Mon Jan 20, 2014 12:14 pm

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

Post by miles monroe » Tue Sep 12, 2017 7:20 pm

gotta live somewhere, so house isn't included.

but the textbook answer would be market value minus estimated selling costs.

avalpert
Posts: 5683
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 7:31 pm

miles monroe wrote:
Tue Sep 12, 2017 7:20 pm
gotta live somewhere, so house isn't included.

but the textbook answer would be market value minus estimated selling costs.
You gotta live somewhere - but it doesn't have to be your house. Not including it is just hiding how much you are spending on housing - the more I see this reasoning given the more important I think it is that people take an accurate look at their net worth.

ResearchMed
Posts: 4969
Joined: Fri Dec 26, 2008 11:25 pm

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

Post by ResearchMed » Tue Sep 12, 2017 7:51 pm

avalpert wrote:
Tue Sep 12, 2017 7:31 pm
miles monroe wrote:
Tue Sep 12, 2017 7:20 pm
gotta live somewhere, so house isn't included.

but the textbook answer would be market value minus estimated selling costs.
You gotta live somewhere - but it doesn't have to be your house. Not including it is just hiding how much you are spending on housing - the more I see this reasoning given the more important I think it is that people take an accurate look at their net worth.
Not only might the home be sold, and the proceeds used for rental housing or, importantly, something like an assisted living facility, but the house could be sold and a smaller/less expensive home purchased, perhaps (if needed) in a lower cost of living area, if things went particularly and unexpectedly poorly.
Or one could borrow against the house, without leaving. And then there are the reverse mortgages, allowing one access to money without leaving the home, and able to stay there as long as desired without repaying the loan.
(If one then wishes to argue that there wouldn't be anything for heirs, well *that* is precisely the "value" of the home, too, of course.)

The "value" of the house isn't the same as "what one does with the house" (live in it; rent it out for income and live elsewhere; sell it and live elsewhere; borrow against it, get money, AND still live there... etc.).

RM
This signature is a placebo. You are in the control group.

User avatar
nisiprius
Advisory Board
Posts: 33797
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 8:21 pm

Admiral wrote:
Tue Sep 12, 2017 10:33 am
How is owning a house any different than owning any other real estate...which we DO consider when we calculate our assets and net worth.
It's different because we buy a house to live in, and thus can't easily or quickly sell it without disrupting our lives.
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.

ResearchMed
Posts: 4969
Joined: Fri Dec 26, 2008 11:25 pm

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

Post by ResearchMed » Tue Sep 12, 2017 8:29 pm

nisiprius wrote:
Tue Sep 12, 2017 8:21 pm
Admiral wrote:
Tue Sep 12, 2017 10:33 am
How is owning a house any different than owning any other real estate...which we DO consider when we calculate our assets and net worth.
It's different because we buy a house to live in, and thus can't easily or quickly sell it without disrupting our lives.
We can't access the 403b money, not without DH retiring before he wants to. That would REALLY disrupt his life, and thus mine.
But we surely include that in our "net worth".

Our house is more likely to provide "money that we can use" than the 403b.
Just because an asset is easily available as actual cash doesn't mean there isn't "value" in terms of total net worth.

RM
This signature is a placebo. You are in the control group.

avalpert
Posts: 5683
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 8:33 pm

nisiprius wrote:
Tue Sep 12, 2017 8:21 pm
Admiral wrote:
Tue Sep 12, 2017 10:33 am
How is owning a house any different than owning any other real estate...which we DO consider when we calculate our assets and net worth.
It's different because we buy a house to live in, and thus can't easily or quickly sell it without disrupting our lives.
That may be a reason to be willing to give up more to hold onto it (by forgoing other uses of the asset value) - I don't see why it is a reason to pretend the value doesn't exist.

User avatar
abuss368
Posts: 11457
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: When calculating net worth, how do you value your house?

Post by abuss368 » Tue Sep 12, 2017 8:33 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"
Thank you for the link. That was my thinking in terms of an accredited investor. I have also reviewed many franchise applications and financial disclosure forms. Sometimes it feels as if home equity is excluded more than included.
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

Post Reply