How to Know the True Value of a Home
Knowing the true value of a home can be difficult. As we saw with the real estate crisis from the past few years, the housing market can drastically change over the course of just a few years. So what determines a home’s value?
1) Comparable Home Sales
Unless there is some catastrophic change to housing prices – like a massive round of foreclosures that create a huge supply of homes while demand drops – housing prices will move slowly, sale by sale. The reason is because homes are priced for sale based on comparable home sales. Both buyers and sellers have full access to what homes have been selling for (it’s public information). Therefore, if you are selling a 3 bedroom 1 bath home two blocks away from another 3 bedroom 1 bath home that just recently sold for $180k, you wouldn’t price it at $300k. It’s likely going to sell somewhere in the vicinity of $180k.
While there are a ton of different variables that go into a home’s value, recent comparable sales are pretty much the best indicator of what people will be willing to pay.
2) Features of the Home
The whole reason people are able to flip houses and make a nice profit doing it is because the value of a home is not just tied to the number of bedrooms, number of bathrooms, etc. but the condition of the home overall. Sometimes a trashed home can sell for $80k and be flipped for $180k. You can bet that the house flipper did not put in $100k of investment into the property; they may have put just $50k. The condition and features of the home matter when it comes to home value.
Photo by Mirage floors
As someone who recently bought a home that was cosmetically outdated, I saw firsthand how the value of a home is affected (both positively and negatively) by the features of a home. The home we bought has some room for improvement, so it ended up selling for $32k less than the original list price. If the seller had put in $10-$20k of work into the house, they likely could have gotten their original list price. Adding things like an updated kitchen, new fixtures, and staging a home properly can make a home more attractive to buyers and in turn increase the final sale price.
3) Home Appraisal
When a bank gives a loan for a house, they want to make sure the house is worth at least the loan amount. This entails an appraisal that essentially looks at a whole bunch of details of the home, as well as some comparable homes that have recently sold.
Appraisers spend a lot of time putting together their appraisal. Twenty-plus hours is not unheard of, and appraisers have to make sure they have a thorough case for the number they value a home at. If a home is appraised less than the offer price, deals can fall through or at least get a little because it can be appealed by the sellers.
If you are a homeowner or a potential homeowner, it never hurts to track what homes have been selling for in your neighborhood or the neighborhoods you are looking at purchasing in. The best tool for this is Zillow, which I wrote about in my post How Zillow Fueled My Real Estate Obsession. A warning: Zillow is a huge time suck, even if you don’t plan on buying or selling for years!