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Real Estate and Home

Yesterday, I pointed out that the house you live in is an essential part of your net worth calculation. But determining the value of your house, especially if it’s the house you live in and not something you track as an investment, can be tricky.

It’s easy to determine the value of your mortgage to include that in your net worth calculation. Just look at the latest statement from the lender. The statement will highlight your remaining balance, and it’s a number you can’t escape if you do in fact, as you should, look at your statement every month.

The house can be trickier to value. But if you include your mortgage in your net worth calculation, you should also include some value for your house. And it should be a value that makes sense. There are at least three ways to determine your home’s value for the purposes of your net worth calculation.

1. The value of your home is the price you paid.

When you purchased your house, you and the seller agreed upon a value. You then paid the seller that much money, whether you borrowed the money or not, and paid additional fees to complete the purchase. It’s not wrong to consider the purchase price the value of your house for your net worth calculation purposes. No one could say that your figure would be wrong if you use this approach. After all, this was the last market-confirmed value, and there won’t be another market-confirmed value until you sell the house.

This is a problem if you’ve lived in this house for a substantial amount of time. Your community may be more desirable than it was when you moved in, or it may be less desirable. Your neighbors in similar houses might have sold their homes for more money in the intervening years, and the sales price of “comparables” may effect the potential sales price of your own home. You may have made improvements to your home or you may have let it fall apart. All of these factors can change the value of your home, and you can’t be sure until you put it on the market and receive at least one offer.

The big benefit of using your house’s purchase price as the value of your house in all future net worth reports is that it ensures your net worth progress reflects mostly the financial decisions you make on a day-to-day basis. That would allow your net worth progress to present a better picture of your behavior with money, but it wouldn’t really represent your true net worth at any one time.

If however, you own your house for a sufficiently long time, there’s a great chance the value of your home will be so far off from the purchase price that your net worth with a number in old dollars is relatively meaningless. An interesting remedy would be to use your purchase price initially, and then adjust your home’s value on your balance sheet once a year based on the rate of inflation. This will allow you to continue using the house’s purchase price, but it was always be in “today’s dollars,” just like your mortgage and the rest of your balance sheet.

2. The value of your home is defined by appraisal or competitive market analysis.

In order to pay property tax, your local government depends on appraisals. Appraisals provide a way for the government to look at your land, your home, and any changes to either since the purchase of your home to determine the amount of your tax bill. Appraisals also come into play when you’re going through the process of selling your home. When you pay tax, you want the appraisal to be low, while when you’re selling, you want the appraisal to be high. And if an appraisal isn’t inline with the owner’s expectations, the owner can challenge it.

Using the latest appraisal in your net worth statement offers a more timely valuation, but it may not be a valuation you agree with. It may not be a valuation that has any relevance to the amount of money a buyer would be willing to pay, either. It is the result of someone’s opinion — a professional’s opinion — but a real estate agent familiar with your home and your neighborhood may be better professional to offer such a valuation. And if you ask a professional who doesn’t have any reason to exaggerate, you can probably get a relatively accurate estimate.

A real estate agent might be willing to do a competitive market analysis for your property if you appear to be intending to use that agent to represent you in a sale. And certainly, an agent who is willing to do this work for you will feel he or she is in a good position after doing a significant amount of work for you to choose that agent as your broker.

A competitive market analysis may be more accurate than an appraisal, but neither of these would you do every month to keep your net worth calculation “accurate,” or to follow the potential of a sale price that might change on a month-to-month basis.

3. The value of your home is provided by Zillow.

Anyone who has shopped for a house in the last few years is likely familiar with Zillow. I’ve only just begun to look at houses — and I’ve paused those efforts during my latest round of travel — and I’ve been using Zillow to plan most of the visits. Zillow’s estimate — or Zestimate — for one property I was interested in was a good $100,000 or more higher than the seller’s asking price.

So how does Zillow come up with their estimates for each property? Zillow uses public data about recent sales and uses a calculation — a proprietary formula — that takes factors about the home and its neighborhood into account. A few real estate agents I’ve talked to don’t like Zillow’s estimates. It seems to make their job more difficult, and they believe it could lead buyers or sellers to make bad decisions. I think it’s important to remember this value is just an estimate, but it is based on data, and that makes it appealing to people wishing to track their net worth (as well as to people house shopping).

A publicly-recorded sale of one house in a neighborhood can send Zestimates in one direction or another without much warning, even if that house bears little resemblance to one’s own. And that’s one of the possible reasons house values are fluctuating month to month on the net worth report submissions from Naked With Cash. Zillow offers verifiable data to support a valuation on a balance sheet, and it gives someone the comfort level of not having to guess the value of their property on a day-to-day or month-to-month basis.

The question is whether Zestimates are correlated to actual sales prices. And there have been a few analyses completed outside of Zillow to determine if there is a trend of Zestimates to be higher or lower than realized prices, but every area seems to be different.

What is your method for including a value for your house on your balance sheet? I have not owned a house in the past, and I don’t own one now, so I’ve had no reason to decide on a method for myself. I’m curious how other people think about the value of their house while they own in.


Net worth is a calculation that immediately defines an individual’s or household’s financial position. It’s only one piece of a greater financial puzzle, but it’s an important piece. The concept of wealth relies mostly on net worth, which contrasts with the concept of poverty, which is generally related to a different financial equation, income.

Wealth however, is relative, while net worth is absolute. Place someone with a net worth of $50,000 in the middle of New York City, and she’s likely to have problems living the same lifestyle as those around her. Place the same individual with the same net worth in rural Kentucky, and the wealth will go further. Visit a developing nation elsewhere on the globe and $50,000 will feel like a million bucks.

In the Naked With Cash series, readers are sharing their net worth every month. And before that, I shared my financial reports publicly since 2003. Readers who stayed with me since the beginning — and there were many — followed my journey from a net worth of $21,000 in July 2003 (a few years after I began trying to improve my financial situation) to a “non-business” net worth of $373,000 in December 2011. (If I had included my business net worth, which would have consisted of income earned from my business but not distributed to me personally and the proceeds from the sale of that business, the figure would have been significantly higher.)

As a net worth calculation is valid only for one specific moment of time, seeing net worth change over time provides some context to a net worth calculation and offers more insight into one’s financial condition.

How do you calculate net worth?

The equation is Wn = A – L. Wn is your net worth, the value you want to calculate. A is the value of all of your assets. L is the value of all your liabilities. Being able to calculate your net worth depends on understanding what your assets and liabilities are.

Assets include everything you own. That means everything from bank accounts in your name to the value of your furniture and linens.

Liabilities include everything you owe. Your credit card debt is a liability, but so are the taxes you will owe on your investments when you sell them.

Add up the value of all your assets, add up the value of all your liabilities, subtract your liabilities from your assets, and the result is your net worth. It’s a fairly simple calculation, but people often get in trouble when trying to determine the value of their assets and liabilities. It’s not always straightforward. In fact, most of the time, people don’t include all their assets and liabilities. When you want to track your financial progress from month to month, sometimes it makes sense to exclude certain factors, and settle for a “modified net worth” equation.

When I reported my net worth each month, and when the Naked With Cash participants do the same, the number on the bottom line is a “modified net worth,” not a true net worth, because there is room for some customization of the equation. We don’t need to show every asset and every liability to get a continuing picture of financial progress.

How does a house fit into net worth?

The house one lives in is a curious asset. It’s so curious that some people refuse to believe it is in fact an asset. This seems to have started with a popular book promoter and seminar salesperson, Robert Kiyosaki, who in his influential book declared that houses are liabilities. It’s blasphemy! Regardless of whether you have a mortgage, a house is a physical object you own. Liabilities are not physical objects, at least when it comes to liabilities on a balance sheet (the net worth equation).

The word “liability” can have a broader meaning: anything that has the potential of causing you trouble. In that sense, children are liabilities. Responsibilities are liabilities. Performing your own electrical maintenance is a liability. Your neighbor’s dog is a liability. Therefore, your house is a liability. But don’t include it as a liability on your balance sheet, because your house is an asset when it comes to your finances.

There is absolutely no argument otherwise. I’m always happy to entertain dissenting views on Consumerism Commentary, and I’ve been proven wrong on issues before, but your house is an asset.

So now that we know your house is an asset, with absolutely no room for disagreement, why is a minority of financial experts so adamant that houses are liabilities? If they are, they’re not talking about the net worth equation. They simply want to point out that owning a house is a money-draining endeavor. There are two categories of assets that can appear on your net worth statement: income-producing assets, and expense-producing assets. In Kiyosaki’s infinite wisdom, he has completely confused his legion of fans by calling the first category “assets” and the second category “liabilities.”

It’s like a famous chef deciding to call unhealthy meats “meats” and unhealthy meats “vegetables,” and then inspiring a rather loud community of followers, after heavy promotion on The Food Network, to believe that healthy meats are actually vegetables.

Your house is an asset.

Where does a mortgage fit into net worth?

Your mortgage, if you have one, is a liability. The remaining balance of your mortgage loan is included on the liability side of a balance sheet. It, along with all the other amounts of money you owe someone else, is subtracted from the total value of your assets to determine your net worth.

If you take the value of your house (more on determining this value) and subtract the balance of you mortgage, you have your house equity. That’s the same calculation for any secured loan, or a loan that is “attached” to an asset. But your equity does not need to be included separately in your net worth, because you’re already accounting for the value of your house on the asset side and the balance of your mortgage on the liability side.

The idea is that by paying your mortgage bill each month, your equity increases. Some mortgage loans are structured in such a way that your equity would only increase if the underlying value of the house increases. That’s the case with interest-only mortgages. For a long period of time, borrowers who have interest-only mortgages never get to the point where they’re decreasing the principal balance of the loan.

Why not just leave your house and mortgage off your balance sheet?

If you rent the space where you live, you generally don’t include your future rent payments as a liability, even though they are, in one sense. Furthermore, the increasing or decreasing value of your house has little relationship to your financial activities on a day-to-day basis. Your net worth could be increasing every year due to your living in a developing neighborhood, but this could be masking financial problems with credit and debt, or other decisions with money that will eventually get you into trouble.

What good is your net worth bottom line if it reflects positive increases during a period where your checking account is dealing with overdrafts and your credit card balances are increasing?

This is why it’s important to look at more than just the bottom line of a net worth statement. When you see an increase in net worth from month to month, look at the details. Did he receive a windfall inheritance? Is he changing his house’s value every month based on an estimate? Did she pay off her debt but completely deplete her emergency fund? Context and details are important in a net worth calculation. Otherwise, it’s just a number that doesn’t explain much about one’s financial situation.

But how do you come up with the right value for your house? I’ll look at some methods for determining your house’s value for the purpose of net worth in a future article.


It’s the height of home repair season, a time when established contractors are often in demand and unavailable. That’s a big opportunity for the fly-by-night operators to step in.

Hiring a contractor to do work on your home, whether it’s a relatively small job or a major renovation, is a big deal. For most consumers, your home is your biggest investment. It should be treated with the level of respect that comes along with that.

Just like you wouldn’t want some quack of a doctor to perform surgery on you, you don’t want someone with questionable skills to be operating on your home. On top of that, if you do end up with a shady “contractor” you not only run the risk of poor work you also are taking a chance on getting ripped off.

Scams in the home improvement business have been around for a long time. They’re finely tuned and very focused on getting consumers at their points of maximum vulnerability.

Recognizing how their game is played, however, can help you avoid getting ripped off. And, if you play the role of consumer by the book, you’ll have the best chance at getting the job done properly for a fair price.

What to watch out for

Ideally, you should be seeking a contractor rather than the contractor seeking you. So, when someone comes to your door after spotting some loose shingles, cracks in your driveway, or just about any other problem that could benefit from repair, watch out.

One of the oldest scams in involves the door-to-door approach. They’re looking to do two things: tempt you with their immediate availability and get a commitment from you without giving you the benefit of thinking things through or reviewing your options. More than likely they’ll also dangle a price that’s too low to believe. Unfortunately, for many victims, that combination can be irresistible.

You should try to resist, however, because the very next thing after you say you want the work done is you’ll be asked for money. More than likely they’ll ask for cash or, if they take a check, it will be cashed before the job even gets going.

Regardless of whether the contractor looks the part, sounds impressive, or otherwise spins a believable tale, avoid these sorts of spur of the moment decisions. Driveway repair schemes, in particular, are widespread during the spring and summer months. A crew of workers will troll neighborhoods looking for driveways in rough shape and pitch the homeowner that they can do the work then and there on the cheap. Why? Because they claim they have a bunch of asphalt left from a previous job that must be used up. In reality, they drive around with this asphalt and what they want is someone who will lured by the chance of a cheap repaving. The result for the unfortunate people who agree is a scam that involves a demand for more money with the threat of leaving a partly finished job.

How it should work

The simplest way to avoid these contractor scams is to understand the proper way to hire someone to do work on your home. That involves doing a bit of homework and taking the time to screen contractors you are considering hiring.

Recommendations are not the final word, but a place to start. Many jurisdictions license or register contractors. It is vital that consumers make sure a contractor they are considering is properly licensed or registered with the state, county, or municipality where the work is to be done. That’s a way to avoid fly-by-night outfits and typically means the contractor has at least a minimum of amount of insurance so you don’t get left holding the bag if something goes awry. (Here’s a list of state and local consumer agencies by state that can help you track down the rules where you live.)

Check with the agency that licenses or registers contractors- or your state attorney general – to see if many complaints have been filed against any company you are considering. Look on the Better Business Bureau website, as well.

Invite at least three contractors to provide detailed estimates of what they think the work should cost. Getting estimates should be free. At their visit, ask to see their liability and worker’s compensation insurance (if they have anyone working for them). Be sure to ask them to be specific on their estimates, including any particular materials they might use (the brand of window, for instance, if they’re replacing windows). Ask what the estimate includes and does not include. Check if permits will be needed for the job and if they will be getting them. A reputable contractor will play by the rules and take care of those sorts of details. Failure to get a required permit could result have serious consequences for the homeowner.

Always ask when payments are due. Payments should be incremental, starting with a small deposit, followed by percentages of payment made after certain milestones are reached, with the last payment of, say, 25 percent, being withheld until the work is completed to your satisfaction.

The lowest price is not always the best deal. Pay attention to how the various contractors communicate with you, how thorough their estimates are and how inclusive. A shady contractor will offer a low-ball estimate to entice a customer and later jack up the prices. You want to hire someone with an established track record, references you can check, who understands what they’re doing.

It takes more time and more thought, but playing it safe will help you dodge the worst of the worst and avoid home improvement ripoff.


Once again, I’m finding myself nearing the end of my one-year lease with the need to make a decision about my living situation. I moved to my current apartment in the summer of 2007, at a time when I had been more comfortable living off some of the income from my business. Until that point, I remained fiscally conservative with my extra income, putting as much into savings as possible, not believing earning an income from primarily blogging would be sustainable in the long run.

Accepting the fact that I had a growing income, I allowed myself to move into a bigger apartment in a nicer neighborhood. That was seven years ago. And around this time these past few years, I’ve repeatedly considered whether it’s time for me to buy a house, leaving the world of renting behind.

The popular belief seems to be renting is throwing money away, but I couldn’t disagree more. Renters’ expenses for living are much lower than those of homeowners. The expenses of living in a house, and maintaining the structure and the land, add up and make this proposition very expensive. A house may increase in value over time, but rarely enough over the long-term to beat inflation, and in order to realize any of those gains, owners must sell and downsize.

I can’t even decide where I want to live, so buying a house that I might end up leaving soon isn’t a good decision. I could find myself in another predicament relatively soon — whether to try to sell a recently-purchased home or try my hand as a landlord, potentially from a distance. This doesn’t seem to be the type of lifestyle I would want, not to mention I haven’t yet had the need to develop some of the skills that would enable me to take care of problems around a house.

There is an urge for me to leave. I would like to have more space, not less. I like my neighbors but I’d probably like them more if we weren’t living so close. The reasons to opt for a house rather than an apartment seem to be related to lifestyle, not to the potential of a financial advantage (which is dubious, anyway). So my next course of option may be renting a single-family house.

But there are ways to make owning a house pay. Forgetting for a moment that I don’t know where in the country — or the world — I want to settle down for an extended period of time, owning a house that provides an income might be a good solution for me. The reality is that I could purchase a two-family house or a house with an apartment with cash, though I may still borrow money if the situation is right. I could rent out the apartment, and the rent would cover the taxes (and potentially part of the mortgage payment if I borrow).

I live in New Jersey, and property taxes are high throughout most of the more desirable portions of the state, and those costs reduce the appeal of owning a single-family house that doesn’t generate an income.

A recent article in the New York Times warns against buying the most expensive house you can afford. Doing so involves taking on much more risk. The loss of an income you rely on can drive someone down the path towards foreclosure. An unexpected job loss can occur at any time, regardless of the national level of unemployment.

Yet, there seems to be some situations that warrant buying if not the biggest house you could absolutely afford, something at the top end of your budget. If you meet these conditions, you may be able to make stretching your budget work from a financial perspective. This is the only way it could be smart to extend your reach rather than buying the least amount of house in which you could see yourself comfortable.

  • Even after buying the house, you’ll have assets. You’re not putting all of your wealth into the house.
  • You have a clear plan for using your own home to generate income that, if combined with a conservative percentage of other income, covers mortgages, taxes, insurance, and other expenses.
  • You get a great deal.

That last point is important. And real estate agents are tricky — they want to close as many deals as possible, so they will often convince a buyer a deal is great when it’s not. I like the way Warren Buffett invests in companies. He has a brand, so an investment from Warren Buffett may be worth more than the same investment from, for example, a hedge fund. So companies will cut Warren Buffett a deal. He doesn’t just go out and buy stock in a company like we smaller investors do.

When Bank of America was on the ropes, the company gave Buffett’s Berkshire Hathaway a $1.5 billion discount on preferred shares. In addition, when Buffett decides to divest, he’ll receive a 5% premium on the value of his investment. These sweetheart deals are key to building wealth through investing at a quicker rate than buying and holding broad market index funds for more than three or more decades.

Getting a great deal doesn’t have to mean buying a fixer-upper. There are a lot of motivated sellers who are willing to negotiate, particularly if you have clout, like Warren Buffett. You won’t have that kind of clout, but having cash seems to go a long way in gaining negotiation strength for the buyer.

This is all good in theory, but in order to apply it to my specific situation, I still have questions I need to answer. I could give myself more time by renewing my lease and paying an extra free for the freedom to “break” it with notice, but that is the same thing I’ve done for the past several years. I’d like to see a change this year. Here are my questions:

  • Do I want to stay in New Jersey? New Jersey has a bad reputation, but the area where I live is nice, and there are other fantastic places in New Jersey to live. But it is expensive. House prices are high and taxes are high. I have friends and some family nearby. People who live elsewhere can get much more property for the same amount of money, and my income is the same regardless where I live. My money could go farther where the cost of living is lower.
  • If I don’t stay in New Jersey, where would I live? I have family in California — Los Angeles and San Diego — making those locations a choice that makes sense. But California is also expensive. My girlfriend lives in Phoenix and will need to stay there for at least another year, but I haven’t been convinced yet that Phoenix is the best location for me.
  • Am I willing to do what it takes to be at least some kind of landlord? My friends who are or have been landlords mostly dislike that particular choice, but I do have other friends who are able to manage properties part-time. I think a house in which I’d live that has an associated apartment might not be too difficult, and I’m in the position to be able to afford help when it comes to maintenance, but what if I decide to move fairly soon?
  • Would I be better suited to renting a single-family home? That would give me more flexibility and less responsibility, while possibly expanding my lifestyle a little bit.

There’s a lot for me to consider before I need to give my currently landlord my notice at the end of April. I don’t like the fact that indecision and inertia has kept me in the same place for several years more than I would have originally expected. What do you think you would do in my situation?

Photo: Flickr


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