Determining Probable Market Value of a Property
Thinking of selling your home? One of the first questions a potential home seller has is this: “what’s my home worth?”
Real estate professionals will establish the probable buyer value (do a market analysis) by comparing your home to others like it which have sold recently and perhaps also those which are currently under contract (sale pending). These similar homes are called comps (for comparable listing, pending, or sale). They factor in market conditions as well (buyers market, sellers market, inventory shortage or excess).
What is an ideal “comp”? It is a sold home that is:
- recent (within at least 6 months, but preferably 3, similar market conditions)
- nearby (same zip code/town, within a mile is best, same schools, within same complex or subdivision is ideal)
- similar type of location (interior lots vs one backing to a freeway, school, high voltage lines)
- like condition (similar amount of updating/remodeling)
- if the subject property has an added family room, the best comp would also have an added family room (original square footage usually sells for more on a price per SF basis than added living space, and additions made without permits and finals are worth less than square footage with permits / finals)
In a tract subdivision or condo complex with many recent sales, this can be easy. If the subject property is very similar to several recently closed sales except for either the level of improvements or the lack of them, an adjustment would be made only for the condition. In my experience, the same tract house may have a range of 10% – 15% of value between completely original and not well maintained to thoroughly remodeled with high quality appliances and upgrades. (Most homes are somewhat updated. Few are either entirely or original, or even more rare, completely run down.)
Let’s do an example of a tract home in which there are several sales nearby of the same floor plan in recent months. And let’s say that a typical home there, somewhat updated, sells for $1,000,000 just to use a round number. The numbers could break down along these lines:
- typical sale, moderately updated $1,000,000
- same floor plan, mostly original condition $900,000 – $950,000 “depending” (very original to run down could go lower, depending on market conditions)
- same floor plan, remodeled, turnkey $1,050,000 – $1,100,000 “depending” (“stunning remodel” could go higher depending on market conditions)
The range of values is often 10% on the same street, but it could be as much as 15% or 20% or more if you have a difference of more than just condition (lot size, precise location, view, a change in market conditions between one sale and the other). As an example, if all the comparable properties were “all original” and your home is “somewhat updated”, it’s likely that your home will sell for 5% more than the others did because of your updates. The range between “all original” and “stunning remodel” is not usually more than 20%.
It is much, much more difficult to establish market value for a home when there are no good comps. Sometimes the property being evaluated is extremely different from those sold recently & nearby.To establish a probable market value, it again will be a matter of adjustments, but when there are no good comps, a lot of adjustments must be made. Real estate professionals will adjust up and down for condition, location, the market’s behavior etc.
The most important factor is always location. If a home is overbuilt for the neighborhood (too improved or too big for the area), the nearby homes will pull that home’s value down. If a home is modest for the neighborhood (on the small size compared to others or not as improved), the nearby homes will pull that home’s value up. (In real estate textbooks, that’s called the principle of regression and the principle of progression.) If the comps are in a better school district than the subject home, it will be necessary to adjust downward for the schools. If the subject’s lot is the largest in the neighborhood, adjust up for the neighborhood.
On these hard-to-comp homes, often it is important to arrive at probable market value from several approaches. One approach might be “what does the neighborhood sell for, generally?” another might be “what would this home in another neighborhood sell for” (and then adjust for area), or “what would this home have sold for last year” (and then adjust for what the market has done since then). By trying to establish the value from several angles, it can become clear that the home is likely to sell within a particular price range.
Finally, homes are seldom worth just one price, because when a property sells it’s about both price and terms. By terms, I mean other factors that can influence how much a buyer will pay and how much a seller will take.
For example, these terms might sway a seller to take less money:
- an all cash offer
- an as-is offer
- a quick close of escrow or a long close, depending on what the seller wants or needs
- a free rentback for the seller
And these terms might cause the seller to get more money for the property:
- the seller carrying the financing
- the seller accepting a contingent offer
- the seller offering a lease-option to buy
- the seller including personal property with the sale
- the seller providing some other incentive (e.g. paying for closing costs)
In one multiple offer situation, a seller client of mine opted to take the offer at the lowest price because it was an all-cash deal and a 5 day escrow. It was a “sure thing” and my seller wanted the house closed more than the seller wanted top dollar. That is not usually the case! Things like that can “throw” a comp a bit, so when factoring in a probable market value of a home, it is important to consider any conditions impacting the sale price, such as these terms.
If one comp looks radically different than other similar sales, it’s probably a result of the terms of the sale and not really market value per se.
If you would like to know the likely market value of your Los Gatos or Silicon Valley home, please contact me. I’d be happy to run the numbers for you. Send me an email to firstname.lastname@example.org with your address and contact information (and any details about your home) or fill out my online market analysis request form. It would be my pleasure to assist you. (This offer is for home owners only, and for properties not currently listed or pending sale.)