Real Estate Value on Net Worth Statement

[45th Birthday]

Interesting responses. It seems that people are addressing three additional questions in addition to my original one:

Whether to include real estate and other assets in a net worth calculation to begin with: I include real estate because it is significant, and affects the amount of estate tax that will eventually become due. I don't include cars, jewelry, art, furnishings, etc. because even though in total they would amount to a few hundred thousand in liquidation value, they are too hard to value and that isn't a big number relative to the other assets.

What value to use for the real estate: I use values I think are reasonable and achievable if the properties were to be sold. I don't use tax assessor values because those are not good, and I don't use Zillow for the same reason (Zillow currently values my three homes at an aggregate of $1 million more than I do).

Whether to use after-tax values for assets: Since I'm using this primarily for estate tax purposes, I don't need to worry about capital gains or income taxes. If I were using this to look at withdrawal rate, I might be more concerned with taxes.

After reading the answers so far, I think I'm on the right track. Thanks.

 

[jebmke]

Interesting responses. It seems that people are addressing three additional questions in addition to my original one:

Whether to include real estate and other assets in a net worth calculation to begin with: I include real estate because it is significant, and affects the amount of estate tax that will eventually become due. I don't include cars, jewelry, art, furnishings, etc. because even though in total they would amount to a few hundred thousand in liquidation value, they are too hard to value and that isn't a big number relative to the other assets.

What value to use for the real estate: I use values I think are reasonable and achievable if the properties were to be sold. I don't use tax assessor values because those are not good, and I don't use Zillow for the same reason (Zillow currently values my three homes at an aggregate of $1 million more than I do).

Whether to use after-tax values for assets: Since I'm using this primarily for estate tax purposes, I don't need to worry about capital gains or income taxes. If I were using this to look at withdrawal rate, I might be more concerned with taxes.

After reading the answers so far, I think I'm on the right track. Thanks.

Right, for estate purposes I include a full asset list annually in a letter to my attorney. I provide a swag number for non RE, hard assets but it isn't a lot in terms of value. This is the only time I rack up a full asset list - to give him a listing in case it changes how he views our estate plan.
This year we are selling a rental property in another state so that will change the listing for him. It will also bump our retirement portfolio by the net proceeds.

 

[SpinDr]

I'll keep track of my net worth, including my home equity ,but do not use it in RE type calculations. The home equity kind of fits into the "money needed as a last resort" scenario. A bit divided on this as living in Orange County CA it is not unusual to have a pretty big chunk tied up in real estate just owning your own home.

 

[jkern]

For me Net Worth is just a number for fun. This number is not used for any of my financial calculations. I include the full value of my personal residence and assign a ballpark amount for cars, jewelry and all other personal property.

 

[dallas27]

For me Net Worth is just a number for fun. This number is not used for any of my financial calculations. I include the full value of my personal residence and assign a ballpark amount for cars, jewelry and all other personal property.

Ditto, though i do occasionally fantasize (sp?) that it is my cash out, go off grid, nomadic, walkabout, live in a tent money.


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[gerntz]

Like many here, I regularly calculate a net worth number, and I include the value of residential real estate. I have been giving those (realistic) values a 5% haircut to reflect Realtor commissions. Now I'm questioning whether that makes sense. Other items, like equities, are shown without commissions taken out, although they would be much less than 5%. Also, the Realtor commissions would only be a portion of closing costs. Am I overthinking this?

While I include our home in periodic NW estimates, because home value is a SWAG and because it's a small % of the total (We don't live in close to a McMansion home or in a high priced RE area), considering realtor commissions is pretty meaningless to me.

 

[Cobra9777]

I do it without commissions because the commission isn't "due" yet.

Agreed, in personal financial statements real estate would be presented at estimated fair value, but excluding the commission. If you list it and it sells, then the commission is owed and recorded,

From SOP 82-1 under the general guidelines for determining estimated current value of assets:

Costs of disposal, such as commissions, if material, should be considered in determining estimated current values.

Also, specifically regarding what to consider for real estate valuation (emphasis added):

Appraisals based on estimates of selling prices and selling costs obtained from independent real estate agents or brokers familiar with similar properties in similar locations.

Doesn't matter whether or not it's "owed." Under SOP 82-1, assets and liabilities are essentially presented at cash liquidation value. Same reason you are supposed to make provision for estimated income taxes due on tax-deferred investments, etc. I suspect very few people do that; and that's a much bigger deal than real estate commissions.

Personally, my net worth calculation includes the value of the personal residence. I even include a portion of the value in my retirement income planning since we plan to downsize at some point. But I don't make any deduction for anticipated selling costs, nor do I reduce tax-deferred assets for estimated income taxes. I also don't include cars and other personal effects as it's all immaterial.

 

[socca]

I use Quickbooks to manage my personal finances. The tax basis of my house appears on my personal balance sheet. This is the purchase price + acquisition costs + capital improvements. I'm hoping to die in this house (not soon), but if I do ever have to sell, the tax basis will be right at my fingertips and exceptionally well documented - not bad!

As others have said, the net worth is just a number, and I prefer for the number to underestimate true net worth to discourage irresponsible spending. So, I don't mind that the current market value of my house probably exceeds the tax basis by a substantial amount.

 

[pb4uski]

To be fair, you should include that portion of SOP 82-1 (more recently codified in ASC 274) in its entirety, as follows:

Real Estate (Including Leaseholds)

.24 Investments in real estate (including leaseholds) should be presented in personal financial statements at their estimated current values. Information that may be used in determining their estimated current values includes—

• a. Sales of similar property in similar circumstances.
• b. The discounted amounts of projected cash receipts and payments relating to the property or the net realizable value of the property, based on planned courses of action, including leaseholds whose current rental value exceeds the rent in the lease.
• c. Appraisals based on estimates of selling prices and selling costs obtained from independent real estate agents or brokers familiar with similar properties in similar locations.
• d. Appraisals used to obtain financing.
• e. Assessed value for property taxes, including consideration of the basis for such assessments and their relationship to market values in the area.

Also, SOP 82-1, paragraph 12 indicates:

Personal financial statements should present assets at their estimated current values and liabilities at their estimated current amounts. The estimated current value of an asset in personal financial statements is the amount at which the item could be exchanged between a buyer and seller, each of whom is well informed and willing, and neither of whom is compelled to buy or sell. Costs of disposal, such as commissions, if material, should be considered in determining estimated current values.

So the guidance says selling costs should be considered if material. In most cases, certainly mine, it would not be material to my personal financial statements as real estate is ~22% of our net worth so even 6% selling costs would only be 1.4% of our net worth. In fact in our case it might well be misleading as only one of three properties that we have owned and sold have involved an agent so we have had no selling costs in 2 out of 3 sales.

While I'll concede the guidance is conflicting, it is also very old... older than my CPA DD.... given the Board's recent thinking on fair value, they would not be net of selling costs as the Board would likely feel that to do so would be implicitly recording a liability before the underlying obligation has occurred. In areas that they have focused on more recently like equity securities, the recorded value is not net of selling costs for the same reasons.

 

[Cobra9777]

...So the guidance says selling costs should be considered if material. In most cases, certainly mine, it would not be material to my personal financial statements as real estate is ~22% of our net worth so even 6% selling costs would only be 1.4% of our net worth. In fact in our case it might well be misleading as only one of three properties that we have owned and sold have involved an agent so we have had no selling costs in 2 out of 3 sales.

While I'll concede the guidance is conflicting, it is also very old... older than my CPA DD.... given the Board's recent thinking on fair value, they would not be net of selling costs as the Board would likely feel that to do so would be implicitly recording a liability before the underlying obligation has occurred. In areas that they have focused on more recently like equity securities, the recorded value is not net of selling costs for the same reasons.

I agree that real estate commissions will be immaterial in many cases. That's why I don't consider it in my own net worth calculation. I just wanted to point out that your stated position (same as COcheesehead) was inconsistent with current professional guidance. It sounds like you don't disagree with that; you just contend that it's usually immaterial, the guidance is old, and the Board would likely take a different position today based on recent trends on other issues. That's fair, but I highly doubt that "Personal Financial Statements" are on anybody's radar screen. So the current guidance, old as it may be, "is what it is."

I'd be more curious about your take on the requirement that tax-deferred assets should be stated net of estimated income tax, as if they were liquidated as of the statement date. To me, that's a bit aggressive, given the opportunities for Roth conversions, 10% penalties pre-59.5, etc.

 

[YVRRocketSurgery]

As others are I think alluding too, it depends on the purpose. Eg: Just for a pure networth perspective or is it for estate planning?
And as others have mentioned, RE is pretty hard to assess IMO.

 

[wolf]

Way over thinking this.

 

[harley]

If I know how much I'll be worth when I'm dead, I feel better about it. So every penny counts.

 

[marko]

I do about a 10% reduction from what I think the real estate is worth since most people overvalue their own stuff.

I think there's too much variability in RE prices to narrow it down to the level of figuring in a 5-6% commission.

In our neck of the woods houses are selling for 15-20% over the agent's set asking price; lots of bidding wars taking place. (SIL is a RE broker)

 

[tennisplyr]

Just sold my home @4.25% commission. I didn't initially subtract that from net worth numbers though I don't get that exact. Some add commission to asking price to try to recoup. At the end of the day the fee is not going to change my lifestyle. Broadly speaking my home equity definitely helps me sleep at night.

 

[RunningBum]

If you're doing it for estate tax purposes, do they figure in closing costs at that point? It makes sense to do it the same way they do, whatever that is. I don't figure to be hitting the estate tax limit so I'm not looking.

 

[RobLJ]

That's the reason. I'm not planning to move now, but in 20-30 years? Down-sizing certainly is a possibility over that timespan. Or a reverse mortgage, if necessary.

Unless one is planning to move to a less expensive home/location, and pocket the difference in the process, I'm not sure I understand the rational for including real estate in net worth calculations? It would seem to be a moot point for purposes of establishing a withdrawal amount, unless perhaps a reverse mortgage is part of the equation at some point?

Edit: I have seen mention of autos in net worth on occasion, which creates the same question, minus the reverse mortgage option. What is the point exactly, since one has to live somewhere and drive something?

 

[Sunset]

For my real estate, if I get a good comparison number for example a similar model house a couple of streets over sells, then I use that as my mental anchor value.

Then I subtract 10% for commission and fixing up costs to equal the true value (there are no mortgages involved).

 

[pjigar]

What about rental properties? I do include them in my net worth calculation at Zillow price.

 

[calmloki]

What about rental properties? I do include them in my net worth calculation at Zillow price.

Zillow is too wonky with valuations - I decided to use what the property tax man calls "true cash value" - not taxable value. For me that gives a single consistent source for my valuation, not basing valuation on what I think something is worth. Also, since taxes are assessed once/year our net worth doesn't bounce around. As long as rental values are going up our net worth, if anything, is liable to be understated - which suits me just fine.