Do you know how much the home you want to buy or sell is worth? You can simply go on one of those real estate websites and use their estimate, right? Well, the (now former) CEO of a leading real estate website doesn’t rely on these numbers so you probably shouldn’t either. Sure, computers can crunch numbers based on a property’s location, square footage, and bed/bath configuration. But computer algorithms can’t evaluate the condition of the property, interior features, or updates. These factors can have a huge impact on the home’s value. Follow these steps to value any property the right way.
Step 1: Find Comps
“Comps” or comparable properties are the starting point for determining the value of residential real estate. Ideally, you want to find at least three properties that sold within the past 6 months. Make sure the comps you’re using have characteristics and features that are similar to your property. Model-matches are best. If those aren’t available, find properties that are nearby and similar in style. Also, the more recent the sale, the better. Avoid outliers (high or low) that will skew your results. Use these comps to set a baseline value for the home.
Step 2: Adjust for Size, Features, and Condition
No two homes are identical. Even if you’re looking at a model-match, you need to compare the features and conditions. Be realistic. Homeowners have a tendency to overvalue the features in their home and undervalue features in comps. Buyers do the exact opposite. They place minimal value on features and magnify flaws. Try to put yourself in the other side’s shoes and look at the value of features from their perspective.
You also need to adjust for size. It isn't as simple taking the difference in square footage and multiplying by the price per square foot. Instead, look at two similar homes that recently sold and compare their difference in price with the difference in size. The price difference is usually much less than a price per square foot reduction.
The amount to adjust for features, condition, and size will vary depending on which market you are in. Make sure you are adjusting based on your market and not general rules of thumb.
Step 3: Adjust for Market Changes
In addition to specific details about your house, the general market will affect the value of your home. Say a model-match of your home with similar features sold for $500,000 last year. Don't assume your home value is the same. You need to analyze what your market has done in the intervening time. Remember, the market is always changing and home values fluctuate daily—that is why appraisal reports explicitly state that the valuation is only as of a specific date.
This is where active, pending, and expired listings come into play. See how the market is responding to homes listed at a certain price point. If a listing has been on the market for a long time, that’s usually a good sign that the price is too high. Additionally, most listings expire because the price is too high so that is another good indicator of overpricing.
If you follow these steps, you should have a good idea of the subject home’s value. Contact me if you need help valuing and pricing a home.
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