Comments on: Calculating Net Worth: What Should One Do With Their Primary Residence?

By: Ouida Vincent

Ouida Vincent — Fri, 08 May 2009 18:21:19 +0000

I honestly believe that a primary residence is a roof over the head and not an investment. Charles Farrell Denver Northstar Investments suggests that a home should be part of net worth calculations only if a person intends to sell it and live in something considerably cheaper. I have been through 2 significant real estate downturns. A home is not an asset.

By: Rob

Rob — Tue, 20 Nov 2007 20:13:44 +0000

You should count your homes equity towards your networth. Not counting it is just cheating yourself. Many people downsize when they get older, also does this mean someone who rents but has the same amout of other assets has an equal networth to you. I think not.

mccoymisty@yahoo.com

By: fivecentnickel.com

fivecentnickel.com — Thu, 24 May 2007 01:46:42 +0000

Net Worth vs. Net Investable Assets…

If you regularly read personal finance weblogs, then you know that writing about one’s “net worth” is a fairly popular topic. While I understand the importance of metrics for tracking your progress, I have to admit that I’ve nev…

By: Art Dinkin

Art Dinkin — Thu, 24 May 2007 00:48:37 +0000

This is a good discussion. I think the key is understanding what you are using the net worth calculation for. The “correct” answer is to include the fair market value under fixed assets and any mortgage under long term liabilities. But who cares what the “correct” answer is? There are very few places where you would ever need to disclose your net worth. When you do, you can always adjust accordingly.

The real value of a net worth calculation is it becomes a method of scorekeeping. You can monitor your financial health by examining the changes in your net worth. With that in mind, I think there are several practical and useful ideas presented here. Use the ones that work best for your needs.

Art Dinkin, CFP

By: Bil

Bil — Wed, 23 May 2007 22:34:56 +0000

http://money.cnn.com/2007/05/22/magazines/moneymag/retirement_interrupted.moneymag/index.htm?postversion=2007052216?cnn=yes

By: Ted Valentine

Ted Valentine — Wed, 23 May 2007 16:11:48 +0000

Bil’s post is sobering. This is why you have your emergency fund before you buy, you put at least 20% down, find a bargain, and you never stretch to buy more than you can afford. If you do all those things you usually have a nice built a nice hedge of protection.

By: Bil

Bil — Wed, 23 May 2007 15:40:34 +0000

A house is a very illiquid asset, and very hard to sell on short notice, such as if you lose your job, or face a major illness.

Most posters here are greatly overvaluing their home as a component of their net worth.

When recessions hit even boom areas like L.A. see huge home price drops (early 1990s saw drops of up to 40%).

Of course, in California you can toss the keys on the counter and walk away (but is the same true for your locality?)

When you’ve lost your job (recession, personal medical crisis) you can’t refinance, get a home equity loan, or continue to make mortgage payments for very long.

A popular series in the newspaper located in the largest city in our state (500,0000+) discusses entire neighborhoods with multiple houses for sale (going into foreclosure)

When they can’t sell, those houses get rented, and guess what that does to the resale value of other houses in that neighborhood, and even higher-end housing nearby?

By: PF

PF — Wed, 23 May 2007 15:32:20 +0000

It’s funny, but after reading these comments, it seems like net worth is really a personal thing that depends on each individual and their situation. I would have never really thought of it that way before, but ultimately, your networth is a tool, and we each use it in different ways.

I use a conservative market value of our home minus the mortgage. We have been building our dream home (literally, us with the power tools and lumber) for 7 years. We have hundreds of thousands in equity to show for the last 7 years of work (nights and weekends). I personally include that equity in my net worth because darnit, I earned it!

By: doug

doug — Wed, 23 May 2007 14:54:31 +0000

What I do is use the best guess but slightly conservative market value of my residence and then show the mortgage debt separately at the current value. However, I think you should separate investments, cash and savings from personal assets like your home, cars personal property etc. I always present all my personal assets on the statement I give the bank every year since I want to show as much net worth as possible, but for my own use I categorize everything as investments or personal.

By: Matt

Matt — Wed, 23 May 2007 13:36:54 +0000

I use the purchase price of our house minus the outstanding mortgage Over time this tends to understate our net worth, but net worth isn’t an exact science anyway. For example, we have $370,000 in 401K accounts. We include that full amount in our net worth but the reality is that since we will probably pay taxes when we withdraw the money the accounts may actually be worth less. Since it would be impossible to accurately determine the effect of taxes on the accounts, we just use the full amount.

What really matters, and Trent has made this point before, is the rate at which your net worth grows. It’s just a yardstick – any reasonable method you use it fine as long as you are consistent.

By: PJA

PJA — Wed, 23 May 2007 12:45:23 +0000

I think accountants might put the house in a fixed asset category (along with cars, books etc). The value is what you would likely get for it after sales costs (including clean up prep). Debt goes into another category. Presumably net worth is the current market value of liquid assets (e.g. money market, stocks etc) + current market value of fixed assets (what they would sell for after sales costs, not what you paid) – debt.

By: plonkee

plonkee — Wed, 23 May 2007 08:06:36 +0000

I’m buying my first house and I’m going to use a conservative estimate of current value taken from the selling price of other identical houses nearby and minusing about £5,000. We don’t have annual assessment for tax here – every property in the country was last assessed in 1991.

I’ll then subtract the mortgage value, the repayment penalty (if appropriate) an estimate of the costs of sale and the cost of purchasing it.

By: Dy (www.dyphan.com)

Dy (www.dyphan.com) — Wed, 23 May 2007 07:39:56 +0000

I don’t own a home, but I would use… appraisal value of the house minus the loan amount left unpaid?

By: Ben

Ben — Wed, 23 May 2007 01:43:04 +0000

I use the price I paid for the house as the value of the asset, and subtract the amount of my remaining mortgage.

For my situation, this is the most conservative way to do it without entirely writing it off. The assessed value of my house is about $100k more than my purchase price, but I doubt I could get that for it today, but I guarantee I could get at least my original purchase price back.

By: Hazzard

Hazzard — Tue, 22 May 2007 23:21:43 +0000

I think either way (assessed or market value minus selling costs) are both reasonable. The main thing is to be conservative on the numbers. It doesn’t make a lot of sense to inflate the number at all. I tend to take a “worst case” approach to valuing items like my house and cars. I don’t include any other personal items in my net worth calculation at all. I’ve seen others include all kinds of items like couches, barbeques etc, but that doesn’t really make sense to me. The whole point in me tracking my net worth is to be sure that I’m making good financial decisions to make the number go up. Any money I spend on personal/household items just falls right out of the equation.

By: alex

alex — Tue, 22 May 2007 22:58:39 +0000

Rick,
If you go For Sale By Owner, you will generally get less for your house, as buyer’s tend to take the extra money the seller is receiving into account, when constructing an offer. The lower sales price might still save you money, but generally it will be lower than the price you would get if you had a realtor.

By: sd

sd — Tue, 22 May 2007 21:11:56 +0000

I calculate it similarly – I include the debt, and I include a very conservative market value on the house.

Our assessment (in Denver, Colo.) just went up, in a year when the local newspaper just wrote an article about how many people are complaining about higher assessments. Yet the assessed value is about $20k lower than a conservative market value for our home. In my net worth calculations, I use an amount that essentially follows Hazzard’s guide, I suppose – or a “fire sale” price where, if we had to sell our home tomorrow, I know we could get that price almost immediately. That way I can be assured that I’m not overestimating the value or our net worth.

Including only the purchase price doesn’t make a lot of sense to me — what about equity that builds over time? We bought our first house at a “bad” time in a not-so-desirable neighborhood, and yet our sale price was $50,000 higher than our purchase price five years earlier. In our starting-out phase of life, we don’t have a lot of investments that provide a nearly 30% return in five years, and tax deductions in the meantime, and it wouldn’t make sense not to include that in our financial snapshot.

By: k

Tue, 22 May 2007 21:00:42 +0000

Ditto GeekMan’s question. My assessed value is about $30k lower than market value for a house of my size, style, and area–and that’s not even taking into account the fact that mine has more finished space, an extra bath, and other unusual but value-enhancing features when compared with those other houses. I’d rather guess at the low end of market value because it’ll still more accurately reflect the amount I could wring out of the house in a crunch.

By: Ted Valentine

Ted Valentine — Tue, 22 May 2007 20:50:01 +0000

The simple way is market value minus amount owed on all mortgages. This is more a “gross worth” in my opinion, however.

The more accurate way is market value * 0.85 minus balance on all mortgages. The cost of selling the home, fix-up costs, and moving expenses to be about 10 to 15% of the value of the home. This is what you can expect to “net” from your home sale.

The hard part is getting the market value right after you’ve been there a couple years. I check recent neighborhood sales of comparable houses on my own for an estimate. If you know a realtor they could do a quick market assessment for you if they’re nice.

By: Ace Davis

Ace Davis — Tue, 22 May 2007 20:22:47 +0000

I too use the assessed value minus the loan balance. True, this is partly due to convenience, because it’s not clear-cut what a house will actually sell for at any point in time. I can’t see not including home equity at all, because it’s a real (forgive the pun) asset that will impact your future housing decisions (and perhaps also things like college financial aid eligibility).

It’s worth noting that if your assessed value becomes way higher than the actual market value, you should be able to challenge that assessment and lower your property taxes.