Understanding the Market Value of Homes
Understanding the Market Value of Homes
The market value of a home is generally determined by the realtor preparing what is known as a Comparative Market Analysis (CMA). Market value is an important key in the home buying process. It is important in pricing your home if you sell. It is also important in determining your offer price if you’re buying. Many buyers and sellers, however, don’t really understand it.
Why Is A Market Value Analysis Needed?
A market value analysis of your home is needed to price your home at current market levels which will help get it sold. Many sellers will want to price their home based on what they need from the sale. This is especially true when there is a mortgage to be paid off or funds from the sale are needed for the downpayment on their next home. Sellers may also overestimate the impact on value for improvements made to the home (like a finished basement or updated kitchen). The value of your home is not based on what you need or what you feel it is worth. Market value is strictly based on the comparable sales price of recently sold homes in your area. Period.
Understanding market value also prevents asking too much for your home — pricing it too high. Overpricing your home is likely to result in potential buyers opting not to see your home. (In the age of Zillow, buyers are aware of what similar homes in your neighborhood are selling for.) You also don’t want to price significantly below market value (unless you are intentionally doing so to ensure a quick sale).
Finally, for the seller, knowing market value allows you to better estimate the net proceeds from the sale of your home. The net proceeds are what remains from the sales price after the mortgage, property taxes and other closing costs are paid. Kind of important information to know (smile).
How Is Market Value Determined?
How is market value determined? As stated above, market value is based on the sales prices of recently sold homes in your area. A good market value analysis should give you a value similar to the lender’s appraisal. This is important because the buyer’s lender will not finance a purchase price higher than market value. The appraiser will generally pull from the same pool of homes that the realtor considers and use a similar methodology to determine market value (sales comparison).
How are homes selected to determine market value? A good “comp” selection is just that … comparable. You are looking for homes that are as similar to the subject home as possible. This means similar square footage, similar room count, similar structure, similar condition and similar age. Where there are differences, the value of the comps should be adjusted to account for the difference. The fewer differences there are, the fewer adjustments needed in the comparison. If your home is being compared to homes with clear differences such as inferior condition or fewer rooms (especially bedrooms), the impact on value should be discussed.
You are also ideally looking for homes sold in the last 3-6 months. This is not always possible but that is the target timeline. Homes should also be located near the home being analyzed. Typically, a 1-mile radius in the suburbs and closer in urban areas such as Chicago. It can be further in a rural setting. If your home is a condo or townhouse, comps from the same complex are weighted more. Homes in the same subdivision are also weighted more in the valuation.
You Want Your Home Seen
Homes will get the most attention in the first weeks of being on the market. Therefore, you want to have your home priced appropriately from the beginning. Often, sellers will price higher to “allow room for negotiation”. However, as stated above, these overpriced homes tend to stay on the market ignored by buyers until they come in line with other similar homes on the market. By that time, the listing may be considered “stale” as buyers turn their focus on new homes coming on the market. You also don’t want to miss out on potential buyers who could afford your home but won’t see it because it’s listed above their price range.
As either buyer or seller, understanding market value allows you to understand the credibility of the offer or list price. It is key information for both the marketing strategy and offer negotiations.
If you would like a market value analysis of your home, please feel free to call or email me.