It is easy to get a feel for average market prices when you have been stalking the market for a year and a half. I am speaking out of experience. They say the best way to learn property values is to eyeball as many houses as possible and then monitor them until they sell. While I haven’t seen every single property on the market for the past year and a half, I HAVE monitored every single loft in Orange County and Long Beach. This focus on particular property styles in a certain location allowed me to be very educated about the general pricing of all lofts in our area. Lofts that were priced too high took longer to sell. Those that were priced fairly sold very quickly.
But even so, what houses list for is not always what they sell for. Unless you have access to the MLS or some other listing that also shows what houses sell for, you are guesstimating how much homes are selling based on the asking price. The actual selling price is not updated or revealed on search engines such as Zillow. Still, you need to know what a house is worth. Why? Once you understand how much a house is worth, you can finally separate your house buying decision from your emotions and buy based off of objective reasoning. Additionally, when it comes time to price negotiations when you are trying to submit an offer, you will have the upper-hand with FACTS supporting your suggested price. It’s better than struggling to make sellers see your side of the equation using emotion as evidence.
Before we go into how to determine if the listing price is fair, a few terms must first be defined. These three words are often used interchangeably but refer to very different things.
- Value – Value is your opinion of what the house is worth. Value is entirely subjective, and it may change. Value is affected by internal factors, such as your current personal situation. Imagine a young couple who value living in an apartment in the center of a busy city, one which has an amazing walking score due to a number of neighboring restaurants and bars. But ten years from now, they may value a quiet street, a bigger home with a yard for their dog, and with a good school system for their kids. All of a sudden, their old apartment seems to hold little value. Conversely, value is affected by external factors outside of your control. If the city builds a garbage dump right next to your home, good luck trying to sell it.
- Cost – Cost deals with yesterday. Cost was what someone paid for the property, and has nothing to do with today.
- Price – Price is the correct term for what something is worth today. Seller’s have asking prices, buyers have offering prices, and together, they establish a purchase price, which is tomorrow’s cost.
Barring natural disasters, or states of duress, every home will sell at the right price, which is defined as the fair market value – a price that the buyer is willing to pay, and the seller is willing to accept for the home. Values are opinions, but fair market values are facts. It becomes a fact when the buyer and the seller agree on a mutually acceptable price. Therefore, it takes both the buyer and the seller to make a fair market value.
Now that those terms are defined, how do we go about finding fair market value? Median home prices are not the same as fair market values. They are simply the midpoint of all the prices of homes within the confines of a certain area. One must understand that there is a huge range of prices, and the median is just the middle. It’s too vague a number. There is a better way…
The best way to know whether a listing’s price is fair is to pull up a CMA report – which is a comparable market analysis, or a COMP for short. A real-estate agent can and should prepare a CMA for you before you send in your offer. When we were considering buying an over-priced turkey, we knew deep down that it was over-priced. But initially, it was difficult to separate our emotional ties towards a “dream home”, even though our heads knew better. What helped solidify our resolve was the CMA report that our real estate agent insisted we look at. Suddenly, we were able to turn down the seller, because over-priced homes that rob you of your hard-earned money are not dream homes at all.
There are two sections in a CMA. The Recent Sales section of CMAs should compare your home to others that are located in the same neighborhood, are approximately the same age, size, and condition, and have sold within the past six months. The Currently for Sale section of CMAs compares the home to others also on the market. This should include an analysis that checks for price trends. Do remember that sale prices are given far more weight than asking prices when determining fair market value. Sellers can ask for whatever fantasy price they want, whereas sale prices are facts and indicate fair market value. The best proof of what a house is worth is its sale price. Take the guess work out of the process by analyzing the sale of comparable homes. Be sure to factor in sales information, such as price reductions or large credits given to the buyer for corrective work.
Off course, CMAs also have their shortcomings. It is important not to compare two houses blindly, without knowing all the details of the subject properties. Here are a few reasons why the fair market values of seemingly identical homes (with the same floor plan, age, style, etc.) may differ.
- Wear and tear: No two homes are identical after they’ve been lived in. Make sure you know the condition of both homes you are comparing.
- Site differences within a neighborhood: A corner spot located by the park is a better location than a home facing a busy street, even if they are of the same community.
- Distressed properties on sale: Identifying a foreclosure is easy, but a short sale, not so much. A short sale is not a good comp because it is considered as being sold under duress.
- Floor plans matter: Two homes may have the exact same age, location, size, and condition, but one may have an open floorplan and another may be completely choppy. Therefore, the latter may have a lower fair market value.
If CMAs are not convincing enough, or you are of suspicion, then getting a second opinion is an alternative. You can pay several hundred dollars to get an appraisal of a property. The appraiser gives a non-biased opinion, because they aren’t trying to sell you anything. Personally, I would not recommend wasting money on a pre-contract appraisal. Firstly, a good agent’s CMA is usually as creditable as an appraisal. Secondly, it is not guaranteed that a seller will accept your offer. In which case, you would have spent hundreds of dollars for nothing, not even a chance at owning your ideal home! And that’s just not worth it.
So if property ownership is in the near future for you, congratulations! And hopefully, this helped.