With all the information at our fingertips nowadays, it’s surprising that we hear this question so often. But, apparently, there’s a lot of confusion over just how one determines the market value of a home. Since we believe that an educated client helps the transaction go smoother, we are happy to offer an answer to this question.
Who Determines Market Value?
This is the best place to start any discussion of a home’s worth on the current market. Think of the process as that you would undertake if you were selling your car. How will you determine an asking price for it? Do you just pull a figure out of the air because it’s what you’d like to receive?
In reality, it is worth how much other cars similar to it have sold for recently. It’s the same in real estate. Buyers determine market value, not sellers.
What Determines Market Value?
So, now we now that a home is worth what a buyer is willing to pay for it. So, how do you know what a buyer is willing to fork over? We compare your home to others that are similar and have sold recently.
We will go through the MLS, looking for sold listings within a one to two mile radius of your home. These are known as “comparables,” because we will compare them to your house.
At this point, we have a pile of sold listings that we’ve used only one criterion on – location. Now it’s time to narrow the comparables down, eliminating those that don’t closely match your home.
Here are examples of some similarities that we look for when determining the market value of a home:
Ideally, we’d like to find homes that match the age of your home exactly, but that isn’t always possible. Therefore, we’ll keep any sold listings of homes that were built within three years before or after your home was built.
We also compare the size of your homes to those that have recently sold. We use the square footage to determine similarity here. If we can’t find homes of a similar size as yours we will use both smaller and larger homes, know that all else being equal, the value of yours will fall between the values of both groups.
Condition, upgrades and amenities
The question we ask at this point is: What amenities does your home have that the others don’t? What does it lack that the others don’t?
The bank’s appraiser will deduct value from your home if other homes have upgrades and yours doesn’t, so we must do the same. An updated kitchen or bath will add value over a home without these improvements. A well-maintained home has a higher value than a run-down home.
Typically, this last step will be where the market value of your home comes into focus.
Your Home's Current Market Value
Once we’ve compared your home to the others we should have narrowed down the pile of comparables to just a few. From there, we should be able to determine market value, and an asking price, for your home.
One way we check our work is by comparing the determined market value with the list prices of comparable homes currently on the market. Of course, this isn’t a fail-safe comparison as many homeowners deliberately overprice their homes. If, however, we find several comparable homes priced similar to the figure we’ve come up with, you’ll know we’re on the right track.
Image: Mark Moz, "New Home"/CC by 2.0