What Is My Home Worth?
In short, a home is worth what a buyer is willing to pay. When listing a home for sale, overpricing works against you, the seller.
Getting an accurate valuation of your home is key in setting yourself up for success in the sale of your house. Many real estate agents offer free home valuations, but if you ask three different agents, chances are each will likely come up with a home valuation.
It’s because home prices are always changing; every time a competing property comes for sale or is sold, that can affect what buyers are willing to pay. On that note, it is the buyer that decides how much they are willing to pay for a home, not the seller.
Ok. I know you must be wondering at this point if home prices are driven by what buyers are willing to pay, what is the best way to determine a home’s market value for selling purposes?
Let’s take a look.
How do buyers decide what they are willing to pay for a home?
Buyers engage in a massive comparison shopping exercise; they compare your home to other available homes in the market. When coupled with availability and affordability of mortgage financing, buyer demand changes which means more or less willing buyers in the marketplace.
In practical terms:
1. When buyers visit your home, they compare it to other similar available homes in the area. They compare the features, the layout, and the condition of the property.
2. Most buyers don’t ask sellers why the seller is asking for a given price; they determine the value themselves by inspecting the property and compare to other sold properties.
3. When the home is sold, the agreed price reflects what the buyer thinks the home is worth despite what the asking price is or what the real estate agents advise.
Factors that DO NOT affect the home’s value
Contrary to popular belief none of these reasons affect or determine what a home is worth.
- What you paid when you bought the home
- What you want on the asking price
- What your neighbor, friend, or even the real estate agent says
- The cost to rebuild the exact same home
- How much you spent on improvements and renovations
You’re currently looking to buy a home, would you up your price because of how much the seller spent on renovations, or what they originally paid, or would you try to arrive at the right price independently by validating what the home is worth?
Market value is not static or a single number
Unlike shopping at the mall where prices are fixed, when selling a home, prices are not only negotiable but can vary largely from one home to the next. In fact, a number of things are taken into consideration when determining the value and the selling price of a house:
Now, I know I am saying here that it is buyers that determine home prices, but what a buyer is willing to pay can change or be influenced by various factors.
Actually, a good agent can convince buyers to pay more by using:
1. Effective negotiation skills and sales techniques
2. Generating significant buyers’ interest or the appearance of buyers’ interest to compel buyers to go all in.
Competition compels buyers to pay more so that they can win!
When faced with a competing offer, buyers want to win; and to do that they pay more. Some, a lot more, just so that they can ‘win’, and get the property.
What is the difference between Cost, Price, Value, and Market Value?
Let’s define these common terms:
* Cost is the amount of money spent to build a home, plus the improvements made.
* Price is what you as the seller ask to get for the property
* Your asking price should be set in a way to attract buyers to want to purchase the property, but what you get for the property might be higher or lower than your asking price.
* This is what the home is worth. Buyers do not want to pay any more than what the home is worth. The issue with value is that it changes from buyer to buyer.
* Market value is the value the home can be sold in the market. Value and Market value should be closely aligned, except for cases when either a buyer pays for a property more than they should, or a seller agrees to sell for a lower price.
Competition compels buyers to pay more so that they can win!
Factors that affect the value of a home
The key factors that affect how much a house is worth are the following:
- Location (neighborhood, schools, amenities, shops, crimes rates, etc.)
- Number of bedrooms
- Number of bathrooms
- Size and Layout
- Condition (décor, kitchen, bathroom)
- Access to public transportation is a bonus
Because of all these factors, working out the value of a home is not an exact science, but more like applied, educated guesswork.
House prices in my area
When trying to determine what your house is worth, it is important to review what other similar properties in the area have recently sold for. This is because buyers will validate what they are willing to pay with actual data of what previous buyers in the area purchased their homes for.
Also, try to get an idea of how quickly properties in your area are selling, and at what price.
Here are the top reasons why a buyer might be willing to pay more for a property:
- The home is near a park or highly rated school
- The home has an extra bedroom or an extra bathroom
- Large kitchen with eat-in area
- Large square footage
- Recently renovated
- The home has been professionally staged
- The home is not near a railroad, a waste processing plant, or a high-power electricity grid
- The home is well maintained
- Energy efficient appliances
As a seller, your goal is to find out how much extra value any of the above points would add to what an able buyer would be willing to pay, but aim to be critical and realistic during this evaluation process.
How to find the value of a home?
1. Get a comparative market analysis
Before committing to hire a real estate agent, obtain a Comparative Market Analysis (CMA). This is a detailed evaluation by a real estate agent with the purpose of establishing the market value of the home, typically for listing purposes.
Interview 3 realtors and ask to get a CMA report
As part of the real estate agent interviewing process, invite three real estate agents that are active in your area, and that have sold similar properties to yours; then ask to get a CMA report from each agent. A good agent will sit with you and explain the local market activity, current market demand, and what to expect from the sale of your home.
Your role as the seller is to get enough information so you can form an opinion of how much you should expect to sell for. With that information in hand, you can work with the real estate agent you hire so that the two of you can decide on a pricing strategy that maximizes your chances of getting that top value you are looking to get.
Ask your real estate agent questions such as the following:
- How does my property compare to other available homes for sale in my neighborhood?
- How does my property compare to other similar homes recently sold in this area?
- What are buyers looking for right now?
- How do I need to position my property to maximize the value I get out of it?
2. Hire a professional home appraiser
A home appraisal is performed by a licensed home appraiser; most lenders required a home appraisal before approving the mortgage loan to a buyer. As a seller, getting a home appraisal gives you a solid idea of what your home is worth.
Here are the various things home appraisers evaluate when performing a home appraisal:
Market (your local area):
The region, city, neighborhood where your home is located
Market Trend (demand for the type of property:
Is the market trending up or down? Desirability
Remember buyers do a massive comparison shopping exercise when evaluation other similar properties, and they try to validate what they are willing to pay by looking at what other buyers have paid before.
Appraisers also adjust up or down the value of a home-based on differences between the subject home and comparable properties.
3. Use online valuation tools
Technology is catching up with the real estate industry, and there are now tools available where you can get an instant valuation online. These tools use things such as public records on property transfers, property tax assessments, as well as mathematical models that predict home’s market values based on market trends.
Even though online home valuation tools can give you a general sense of what your home is worth, I strongly advise you to speak with local real estate agents for a more accurate evaluation of your home.
Main things that drive buyers’ perception of a home’s value
Homebuyers seek for validation elements that confirm that what they think a home is worth is accurate; I call those elements ‘validating facts’.
- The amount similar homes have historically sold for are validating facts
- What similar homes have recently sold for are validating facts
- Comparable homes currently for sale in the area are validating facts
- What similar homes are failing to sell for are validating facts
Consider this example:
You are considering putting your house for sale in the market. Two houses down, your neighbor Mark has had his home for sale for the past 45 days, listed at $900,000 and has received no offers.
Mark’s home is identical to yours. Would you list the home at $900,000 or below that amount?
Where to go to obtain these facts
The best way to obtain this information is by requesting it from your real estate agent. Your real estate agent can easily generate reports from the MLS (Multiple Listing System), or other available listing services, and have those reports automatically emailed to you daily.
If you are currently in a hot market and the certain property is sitting on the market unsold for 40 – 60 days, it is most certainly overpriced.
Similarly, if you are currently in a cold market and the certain property is sitting on the market unsold for 90 – 120 days, it is probably overpriced. Aim to remain a humble student of the market
The hidden factors
Foul smells, damp air, exposed electrical wires, plumbing issues might be harder to detect, but they can significantly affect the value of a home.
A Home’s salability influences its value
As explained earlier, the condition of the home is one of the factors that drive what buyers are willing to pay for a property. In fact, simply having a home professionally staged can increase the sold price by as much as 10%.
Before moving ahead with home improvement, ask yourself if the improvement would add value to the home.
Minor repairs or improvements that affect what buyers are willing to pay
Here are some simple improvements that can increase the salability of your home:
- Clean the kitchen, bathrooms, fridge and all around the exterior of the home.
- Make small updated like fix broken doors, caulking, faucets, etc.
- Give it a fresh coat of paint if needed
Even if a properly prepared home may not directly add dollar worth to the market value, it will add appeal and make your home the preferred choice over the competition, which means it can sell faster.
Major repairs that add value to what buyers are willing to pay
Repairs on your home protect you from losing money. If your home has a damaged roof most buyers that are interested in the property would demand a discount that is higher than what fixing would cost.
Here are some major repairs that you should consider fixing before going on the market.
- Old roof
- Structural integrity
- Water damage
- Plumbing, electrical issues.
The bottom Line
Buyers tend to try to drive the value lower by pointing out reasons why the value should be lower, while sellers do the exact opposite.
Even though a home’s value is determined by what an able buyer is willing to pay, that amount is not fixed and can be driven up by a skilled real estate agent who is a good negotiator. An honest real estate agent can provide you, as the seller, with a realistically accurate number of what is achievable given market conditions.
In the end, you should aim to be a student of the market, and pay close attention to what buyers are willing to pay while trying to maximize your chances of achieving the top market value for your real estate asset