What’s my house worth? That’s a question I’m asked every time I meet with a home seller for the first time. My immediate thought is, “Whatever a buyer is willing to spend and whatever you’re willing to sell it for.” Of course, I would never say it like that even though it’s the best answer anyone can give.
Instead, I’ll answer with something like this, “I’m not really sure yet. Let’s take a look at the data and let’s see what a reasonable buyer would pay based on current market conditions.”
I’ll explain the steps I suggest to price homes correctly the first time in any market condition so you’ll never have to ask yourself the question ‘What’s My House Worth’ again.
STEP 1: IDENTIFYING IMMEDIATE COMPETITION
The first step in determining value is to see what homes are for sale in your subdivision or immediate area. Home buyers drive by neighborhoods and subdivisions that they are interested in. If you’re in a subdivision with six other homes for sale you need to know which ones they are and how much they’re asking how much is my house worth.
How do you get this information? That’s easy. Get in your car or go for a walk and see for yourself. If there are no flyers available, take down the numbers on the For Sale sign and make a few calls.
Why is your competition important? It’s important because a buyer that is interested in your subdivision is going to get information on all the homes for sale in your subdivision and make a decision on which ones to see. Buyers are already starting to get an idea of home values.
STEP 2: IDENTIFYING THE REMAINING COMPETITION
I’m sorry to have to break the news but most buyers do not really care about your specific neighborhood or subdivision. In most cases it’s the general location that is more important; not the subdivision. For example, a buyer might want to live in your town because of the schools, or because of the proximity to major highways or transportation and there are several subdivisions to choose from.
In any event, if a buyer is interested in your city you can assume they are going to look at other neighborhoods and subdivisions as well. These houses outside your subdivision are still your competition.
In a nutshell, any other home a buyer looks at besides yours is considered competition.
STEP 3: IDENTIFYING RECENTLY SOLD PROPERTIES
The first two steps talked about your competition, or other current homes for sale. While this is extremely important it doesn’t tell us what the market value is. Anyone can ask whatever they want for their home but it doesn’t automatically mean that’s what the market will bare. Market value can only be determined by what has previously closed.
For example, let’s say there are six homes for sale with a price range from $200,000 to $225,000. This is your competition. Let’s also say that four similar homes sold in the last six months with a range from $185,000 to $210,000.
Right now, the market will only bare a price of $210,000.
But what about the guy listed at $225,000? How is he going to get that much?
Well, the chances are, he won’t. Any buyer working with a realtor will find out what the market will allow before submitting an offer. If an offer is substantially higher than $210,000 there is a good chance the home will not appraise. (Note: homes do increase in value and appraisers take that into consideration when appraising homes. A home sold at $212,000 should have little problem appraising in a growing market.)
At this point it probably doesn’t make much sense to price your home more than $210,000 unless it’s a sellers market. A buyer will realize they’d have to pay top dollar and it might not appraise.
STEP 4: RESEARCH MARKETING TIME
Ok, you found out there is plenty of competition and the market will only allow up to $210,000. So, you should price your home at $210,000 beating half of your competition and not worry about the whole appraisal issue, right?
Well, not quite yet.
Now it’s important to add the next element which is finding out how long it takes for a home to sell. What if we found out that all of the homes priced over $200,000 took eight months to sell and all of the homes priced under $200,000 took less than 30 days to sell?
Time is money. Every month you’ll keep writing mortgage checks until your home sells. In an appreciating market it’s not so bad but in a depreciating market it’s not so good.
Do you want to price your home at $210,000 and wait an average of eight months or would you rather price it around the $200,000 range for a quicker sale.
STEP 5: PUTTING IT ALL TOGETHER
At this point we know what the competition is. We also know what the established market value determined by recently closed homes along with how long these homes were on the market.
The key is to put your self in the buyer’s shoes. If you were a buyer and knew the top of the market is set at $210,000 would you want to pay more? Probably not.
If you were a buyer you’d also know that you’re probably going to need to spend something very close to $200,000 because it’s the lowest price among all of the homes for sale.
Will an offer of $190,000 do the trick? You’d be hard pressed, in a normal market, to find a seller who will take that price when the lowest competitor is above $200,000.
So what is the home worth? In this example a seller can expect anywhere between just under $200,000 to just over $210,000 depending on if it’s a sellers or buyer’s market.
The bottom line is once you know what your competition is, what homes have sold for and how long it takes for a home to sell, you’ll have all of the information to answer the question, “what’s my home worth?”