Valuing a home is really no different than valuing any other substantial asset, such as a business, a car or even a financial instrument.  However, since a home is generally the buyer's or seller's largest single asset purchase or sale, inferior research and execution can have a significant impact on the variation between the home's implied (or calculated) value and it's actual Fair Market Value.

[Fair Market Value is a common valuation term that can be easily defined as 'the price at which a willing seller and a willing buyer would participate in a purchase or sale of an asset.'  However, most typically this definition results in a range of value as there is often a bit of overlap between the low range a seller is willing to accept for the asset and the high range for which a buyer is willing to pay for a home.]

First, a few quick points on the mechanics of determining a home's value.  Generally speaking, there are three methods for estimating any asset's market value:

1. Comparable analysis - That is comparing the asset to other comparable assets in the marketplace.  With respect to homes, this means comparing the subject property to other properties currently on the market.  This process involves adjusting the comparable property's attributes to match that of the subject property.  For example, if one of the comparable properties has a basement while the subject property does not, the comparable property price must first be adjusted before it can be compared to the subject property.

2. Recent transaction analysis - Virtually the same analysis as comparable analysis above, however rather than using other properties currently for sale, this analysis compares the subject property to similar properties that have recently sold in arm's-length transactions.  Again, adjusting the comparable sold properties to match the attributes of the subject property.

3. Replacement cost - Perhaps the simplest approach to understand, but yet the most difficult to execute.  The replacement cost approach, as it's name suggests, simply estimates the cost to duplicate the home (including the land).  While there are a lot of details to consider here, key points such as age of the subject property, materials and build quality and of course location play a large part in this analysis.

After you get a handle on the basic mechanics of the above three valuation metrics, it's very easy to suppose that value is purely based on the science of analysis.  When in fact, the above methodologies are simply part of the process.  The scientific part, albeit, still just a part. 

What about the other part of the valuation analysis?  What other part you might ask. 

Well, think of the last car you bought.  What color was it?  If it had been red, or blue, or pink, would you have valued that car as much as the one that was the color you wanted?  Most likely not, and yet it still it has leather seats, a sunroof, a V-6 engine and power windows, just like the one you bought. 

Why would it not be worth as much to you?  Simple, each person places value on certain intangible attributes, like color, location, style, neighborhood, street-type, etc.  And no two people see things exactly alike.  So yes it's simple to estimate the fair market value of an asset like a home or a car, but at the end of the day, you could provide the same scientific analysis on a single home to 50 different people, and you would likely get 50 different views of what it's worth 'to them'.