How to Value Residential Real Estate

Accurately valuing real estate is a full-time job for professional appraisers, so itu2019s not something to be taken lightly. But that doesnu2019t mean youu2014as a potential buyer or selleru2014shouldnu2019t be well-versed in the mechanics behind deriving a reliable value for a property.

Correctly valuing real estate is crucial as both a buyer and a seller. From a buyeru2019s standpoint, you want to make sure youu2019re paying a fair price for the property and that it holds up in the appraisal that your lender will require.

From a selleru2019s standpoint, you want to make sure youu2019re listing at a correct price-point and donu2019t have your home sitting on the market for too long, which can then make the home seem unappealing to potential buyers.

In this blog post, weu2019ll run you through the mechanics to help you understand how residential real estate is valued and how you can quickly figure out the price point at which you should buy or sell your home.

Choose Your Comps Wisely

When youu2019re speaking with realtors, theyu2019ll talk about homes on a u201cPrice per Square Footu201d basis u2013 I.e. u201cThis home is $100/PSF above grade and $80/PSF below gradeu201d. u00a0But when we, as Lenders, speak with our appraisers, our discussion is based around comparable property pricing, or u201cComps.u201d

Comps are recently sold homes in the same neighborhood, with similar square footage, lot sizes, age of build, etc. The appraisers then make adjustments to the u2018compu2019 value either up or down, based on differences between your subject property and the comparable home. We wonu2019t get into the details of how they calculate the exact $-or-% amount of adjustment because it varies by appraiser and item under consideration, but we will focus on the key elements that warrant these adjustments.

Stick to the same location

First and foremost, the biggest rule to consider when choosing and adjusting Comps is location! As my college real estate professor preached, real estate is all about u201clocation, location, location!u201d When youu2019re looking for a comparable property, you must make sure itu2019s in the same neighborhood as your subject property. Once you start going into different neighborhoods to make comparisons, you can get entirely different property valuesu2014especially if youu2019re crossing a major dividing line such as a busy street, park, or commercial center.

Then look at the specific locations of these homes and adjust for their location within the neighborhood. Is your home closer to the nice park?u2014thatu2019ll likely increase its value. Or is your home closer to the street thatu2019s creating noise pollution?u2014thatu2019ll likely decrease its value compared to the Comp.

Look at the same style homes

Next, look at the style of home. If youu2019re hoping to sell your Tudor home, donu2019t look at what tri-levels have sold for. Of if youu2019re looking to buy a new build, make sure youu2019re comparing your property to other newer builds. These home styles will warrant very different prices based on local-demand preferences and overall structural offerings.

Once you have the similar style of home, you can then make adjustments to pricing based on home amenities, such as number of bathrooms, a livable basement (which must have an egress window), 1 vs. 2 car garages, etc. But keep in mind that the neighborhood youu2019re in can play a role in the importance and $-value of these elements. u00a0

For example, garages are critical to have in suburban neighborhoods, so not having one will reduce your value more than if you were in a home downtown, where garages are not as commonplace. On a similar note, it may not be typical to have basements in certain neighborhoods, so having one could definitely add value and salability to your home. But keep in mind that below-grade SQF does not add as much value as above-grade SQF.

Purchase for What You CAN Fix/Flip

While you cannot correct for certain items (location, proximity to commercial areas, noise pollution), there are a variety items that can be enhanced, and this is what our Fix & Flippers are focused on. Theyu2019re focused on updating the finishings of the home, adding an extra bathroom or bedroom if possible, perhaps adding a garage to the site, and overall improving the salability of the home. u00a0

While these improvements wonu2019t make as drastic of price variations as location and overall home style will to the final home price, they can still play a significant role in the appeal and salability of the house. This is where, when comparing your home to a comparable sale, you can make your home either stand out, or note that you may be paying a bit extra to have the modern finishes.

We hope that this has provided some insight into valuing homes. But if you have questions or are uncertain on how to value a home youu2019re looking to buy or sell, our team of Loan Officers at Merchants Mortgage is here to help.