Home prices in the U.S. have risen steadily over the last few years. In many cities, some home values are now at their highest point in history — even higher than the last housing boom.
But what determines the “market value” of a home? How do sellers determine their list prices, and how can buyers evaluate a listing based on current market conditions. Here’s a crash course in determining market value, for sellers and buyers alike.
Let’s start off with a quick definition. In a real estate context, the “market value” is the most likely price a home will sell for within a reasonable amount of time. It is based on local housing market conditions and recent sales activity.
You’ll notice this definition does not mention the original price paid by the homeowner. Unless they bought the home a month ago, the original purchase price is likely irrelevant to the current market. Likewise, the market value of a home has nothing to do with the homeowner’s current mortgage balance. Some sellers list their homes for the amount needed to pay off their mortgage loans. But that doesn’t always line up with the current market value of the property.
With that introduction out of the way, let’s get to the heart of the matter. How do you know the market value of a home you’re thinking about buying? Or the value of your own property, when listing it for sale?
The first thing you’d want to do is track home sales in the area. The longer you do this, the better. It gives you a good base of knowledge with regard to asking prices versus selling prices (hint: it’s the latter of these two that determines market value).
Next, you’ll want to review sales data on homes that are similar to the one you’re considering. This is what real estate agents refer to as comparable sales, or comps. The more alike the two properties are, the more accurate the pricing comparison.
Try to find as many comparable home sales as possible. This will help you support your offer amount, by showing the seller you’re using actual market data from recent sales in the area. Remember, home prices can change over time. So recent comps will give you a better idea of what’s happening now, in the current real estate market.
When you determine the market value of a home, you also need to take any unique features into account. For example, let’s say I’ve found sales data for two Mid-Century Modern homes that are 2,000 square feet. The home I’m considering is also a Mid-Century Modern with 2,000 square feet. But it has a completely renovated kitchen, a pool, and sits on a more spacious corner lot with a great view. The other houses lack these qualities. So the house I’m considering will likely sell for more than the two comps, despite the fact that the homes are similar in size and style.
Negative aspects of the house need to be taken into account as well. Ugly carpet? Busy/noisy street? No landscape? An abandoned house next door? These types of things should be corrected when possible or deducted from the market value.
Here’s a good “formula” to keep in mind when considering the market value of a home in a particular area:
Comparable sale prices + unique features – negative features = a good fair market asking price
Online estimates, especially estimates with a “Z” are merely computer algorithms. There’s no human input. They’re ok if you merely need a “ballpark idea” of what your house is worth or want to obsessively check it every day the way you glance at the stock market daily or now and then. But those estimates aren’t enough if you’re actually going to sell or buy a house.
This is just a basic overview of market value within the context of real estate sales. There’s more work involved to properly evaluate the value of a particular property, especially when the market is changing constantly. And that’s where real estate agents come into the picture.
You can have a house with the exact same features as one across the street but they can sell for difference of 10% or more. An agent that specializes in your neighborhood and type of home will know why. On line pricing services can’t give you that information.
Real estate agents undergo extensive training in this area. Much of their education has to do with real estate market cycles, home prices and values, and related topics. So whether you’re buying or selling a home, you could save yourself a lot of time and energy by having an agent on your side!
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