Accurately valuing real estate is a full-time job for professional appraisers, so it’s not something to be taken lightly. But that doesn’t mean you—as a potential buyer or seller—shouldn’t 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 buyer’s standpoint, you want to make sure you’re paying a fair price for the property and that it holds up in the appraisal that your lender will require. From a seller’s standpoint, you want to make sure you’re listing at a correct price-point and don’t 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, we’ll 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.
When you’re speaking with realtors, they’ll talk about homes on a “Price per Square Foot” basis – I.e. “This home is $100/PSF above grade and $80/PSF below grade”. But when we, as Lenders, speak with our appraisers, our discussion is based around comparable property pricing, or “Comps.” 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 ‘comp’ value either up or down, based on differences between your subject property and the comparable home. We won’t 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.
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 “location, location, location!” When you’re looking for a comparable property, you must make sure it’s in the same neighborhood as your subject property. Once you start going into different neighborhoods to make comparisons, you can get entirely different property values—especially if you’re 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?—that’ll likely increase its value. Or is your home closer to the street that’s creating noise pollution?—that’ll likely decrease its value compared to the Comp.
Next, look at the style of home. If you’re hoping to sell your Tudor home, don’t look at what tri-levels have sold for. Of if you’re looking to buy a new build, make sure you’re 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 you’re in can play a role in the importance and $-value of these elements. 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.
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. They’re 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. While these improvements won’t 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 you’re looking to buy or sell, our team of Loan Officers at Merchants Mortgage is here to help.
The Merchants Mortgage Team