How Do You Figure Out What A House Is Worth?
Can you just go on the price per square foot or is that just a guide to get you close to the value? Using price per square foot when trying to determine what a house is worth can be risky and inaccurate and may end up costing somebody some money. There are so many variables that go into pricing a home to just look at one is too simplistic. Even homes on the same street, the same size and age can have different values. The perceived value a home holds is often not just monetary, from a seller’s point of view it might be memories, a family raised and from a buyer’s perspective it could be the one they’ve been looking for. Let’s take a look at why you have to know more than the price per square foot to determine the value of a home.
Comps are what we call the homes used to determine the value of the home. They come from a Comparative Market Analysis which is used by real estate agents to find the most recent sales that are comparable to the house in question. The danger of inaccurate findings is if the information is not researched thoroughly. Condition of the homes, improvements that were done either during construction or after and how those were done is important. Not all improvements add value and many do not return the original investment or come close. Only homes that have sold are used as comps and only the most recent and closest to the home are used. Similar homes currently for sale nearby or in the same subdivision should be looked at to determine what the competition is and how long those homes are on the market. This information can help sellers determine what they may need to price their home at and also gives buyers a look at options available.
Don’t Use Zillow
When doing research into recent home sales and gathering information about the real estate market in general, one of the worst places to look are sites like Zillow. These sites regularly have the wrong information about the homes for sale, incorrect sales price and or often missing important facts about each sale. In many cases the homes listed for sale or actually not still for sale or the home might show up as sold but has since been sold again and you’re getting the previous sale price. The use of tax cards and lack of important information such as closing costs paid, condition of the home causes some of the “estimates” to be way off. In fact a quick look at a couple of homes showed a single family home listed as a condo and the “Zestimate was $50,000 higher than the list price! Where the estimate falls is either going to please the buyer and annoy the seller or the other way around. If the number is higher sellers get an unrealistic value they think their home is worth and if it is lower buyers get an unrealistic value of what they think they should pay. A lot of time and effort wasted because of poor and inaccurate information.
A house can get sold once or multiple times and each owner puts their style and choice of finishing in the house. Some homes are added to by increasing the square footage either finishing some attic space or a bonus room left unfinished by the builder. Completely new additions are sometimes added dramatically increasing the footprint size and value of the home. How the work was done and by who plays a big role in determining the value such additions bring to the home. A qualified licensed general contractor who got all the relevant permits and applied all the relevant building codes is work that adds value to a home. While a DIY job with none of the above codes and permits adds no value and may make the house harder to sell. Improvements to the home that need to be accounted for could be replacing carpet with hardwood flooring. A kitchen renovation that includes new cabinets, appliances and granite counter tops. A new roof or a HVAC unit replaced are all improvements that add value to a home. Not all improvements add a monetary value but rather making the house more attractive to buyers and getting the house sold is value to the seller. Rarely do home improvements recoup what the homeowner spent so if you’re thinking of doing home improvements do them to enjoy them. Not all of the improvements done to a home are readily available and certainly not on a site like Zillow. It’s important that when using comps to determine value these facts are known in order to get an accurate picture of each home. So in order to compare two houses side by side same size, age only one has substantial additions or improvements you have to make adjustments for each either up or down.
Even new construction homes cannot be valued with a broad stroke of a brush when there are more than one builder involved and the quality of construction used. In some subdivisions there are different neighborhoods with different types of homes, different building methods, builders and price points. It would be incorrect to simply grab the latest three sales in the subdivision and apply the result to a home without comparing everything. In fact you can have one home in one neighborhood a stone’s throw from another home and the prices could be dramatically different. A custom built home compared to a track built home by a national builder may be the same size same age in the same area but the price per square foot of each could be dramatically different. Having a local real estate agent who knows the builders is helpful to determining the value of these homes. Some subdivisions are easier to figure out and price per square foot could be used to figure out the value all things being equal that is. So when can you use price per square foot as a guide? Below is an example of a small subdivision where all the homes are roughly the same size, the same building techniques are used in all of the homes. There are only two styles of homes and the homes sell for list price. The average price per square foot is $113 and the range is $111-$115 typically the larger the home is the price per square foot goes down.
Value Of A Home Here is a completely different scenario of a larger subdivision with different neighborhoods, different quality of construction and different builders. In this case the price per square foot difference is a massive $96 from a low of $129 to a high of $225. The reason for such a large discrepancy is because the larger national type builders are able to build a home for less because of their buying power but also in the materials they use versus a local custom builder. To put it in perspective $96 times 3000 square feet is $288,000 which is obviously a substantial difference.
What is the local real estate market doing where you are, are there a glut of homes for sale or a shortage of homes available. Supply and demand comes into play forcing prices and values to go up. If there is low inventory and buyers are looking for homes then the value of that home that comes on the market goes up as demand increases. In a multiple offer situation a home can sell for more than list price and buyers may not care if it appraises or not, they need a house. On the flipside of that is too many homes on the market where the value of a home is compared to the competition and the ones that offer the best value in either price or condition or improvements gets sold.