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Calculate the value of your home

How to calculate the value of your home

August 28, 2017 — Written by Tiffany Chi

You probably have a ballpark idea of how much your home is worth based on how much you’ve seen neighbors’ homes sell for. However, those numbers don’t give you the full picture of your home’s value, and if you’re planning to sell, there are serious consequences to getting it wrong. If you price it too high, your home sits on the market for months, costing you time, money, and opportunities to bid on your dream home. Meanwhile, pricing too low means leaving money on the table. We’ll walk you through how to estimate your home’s value and the top mistakes to avoid.

How to calculate your home’s value like a pro

Most real estate professionals use the same high-level process to value homes. It involves two steps: finding comps and making adjustments.

Step 1: Finding Comps

The first step to valuing a home is finding “comps”, or comparable home sales as a baseline for your home’s price. “Comparable” is the operative word here—you can’t simply take the last 5 homes that sold in your neighborhood or cherry-pick the homes that sold for the highest price. The goal is to find 4-6 comps that are the most similar to your home based on factors like location, features, and amenities. Here are some basic guidelines for choosing good comps:

  • Recency: Look for homes that were ideally sold in the last 90 days and no more than 6 months ago.
  • Feature Similarity: Choose homes that are the most similar to yours in terms of features, including the type of home (colonial vs. split level), number of bedrooms, bathrooms, and square footage.
  • Distance: When possible, choose homes in the same subdivision as your home. The house a block over may not be a good comparison if it belongs to a different subdivision with different HOA rules.
  • Location: If your home has a unique placement, such as on a busy street, golf course, or waterfront, look for comps that have the same placement.
Step 2: Making Adjustments

When choosing comps, you’ll quickly find that no two homes are exactly the same. Even if you find a comp that is a model match, located next door, and built the same year, there will inevitably be differences in upkeep and upgrades. So, the next step is to make dollar value adjustments for these differences.

First, take each comp and compare it feature-by-feature to your home. Second, when you find differences in important features like square footage or the number of bedrooms, add or subtract the value of that difference from the comp.

For example, let’s say your home has 3 bedrooms and Comp 1 only has 2. The goal is to find out how much Comp 1 would have sold for if it also had 3 bedrooms, so you’d add the value of an extra bedroom to the sale price of Comp 1. You’d continue to make dollar value adjustments like this for every major feature difference between your home and Comp 1.

At the end, you’d sum up all the adjustments to get an adjusted price for Comp 1. This represents how much the comp would have sold for had it been more similar to your home. After getting the adjusted price for every comp, you’ll take a weighted average of the comps to get to your home’s value.

But how do you know how much to add or subtract for a feature difference? To figure this out, you’d look for recent nearby sales of pairs of homes that are very similar except for the feature in question. So for the bedroom example, you’d look for pairs of homes that are almost exactly alike except some have 2 bedrooms and others have 3 bedrooms. By finding the difference in sales prices for the 3 vs 2 bedroom homes, you can estimate how much an extra bedroom is worth.

Aside from adjusting for home features, sometimes you might also need to adjust for market trends like how quickly homes in your area have been appreciating. For example, if you’re in a market where homes have been appreciating quickly but some of your comps are several months old, you might make an adjustment equal to the percentage of appreciation over that time period. Appraisers call these “date of sale adjustments.”

Mistakes to avoid when valuing your home

Now that you have a sense of the overarching process to value a home, let’s go over the top three mistakes people make when choosing comps and making adjustments:

  1. Valuing your home based on your neighbor’s asking price.
    It’s an easy mistake to value your home by looking at how much current homes in the neighborhood are listed for. Just because a home is listed for a certain price, doesn’t mean it will sell for that amount. In fact, if you’re basing your valuation off a home that’s been on the market for a while, it’s more than likely that home is overpriced. When choosing comps, there are three status types to be aware of: active, pending, and closed. Closed sales are recently sold homes. They are the best comps since their values have been proven on the market. Pending sales are homes currently under contract; they’re less useful because you’re unsure of their final sale price. It may be different from the list price due to reasons like seller concessions or a low appraisal. Finally, actives are homes currently on the market. These aren’t good comps because a homeowner can list their home for whatever price they want.
  2. Fixating on an outlier comp.
    It’s tempting to look for the homes that sold for the highest price in your neighborhood and adjust your home’s value off of that. However, if you’ve pulled several comps and notice one that sold for significantly more than the others, you should probably not use it. You don’t know what caused that house to sell for so much more, but you know it’s not typical and so is not a reliable data point. Just think of the reverse: if there was one comp that sold for significantly less than the others, would you want it used in your valuation? Likely no. You’d argue that it might have been a foreclosure or some other unique circumstance. Well, the same is likely true of your expensive comp–it’s probably an outlier that sold under a unique circumstance.
  3. Expecting a 100% return on your renovations.
    Many homeowners mistakenly believe they’ll get the full amount they invested in renovations (or more) back when they sell their home. Unfortunately, the truth is most upgrades you make start depreciating the moment they’re finished. According to a 2017 study by remodeling.com, on average, renovations only give you a 64% return on investment. So even though you may think remodeling your kitchen will pay back a premium, the truth is it may help your home sell faster, but you’re unlikely to recoup the full cost of the work.

Pricing your home correctly is one of the most crucial steps to a successful home sale. It’s a good idea to start by getting a ballpark valuation from an online tool, but you shouldn’t stop there. To get an accurate picture of how much your home is worth, follow the process described above to analyze comparable sales and make adjustments.

Knowing how this process works will not only help you value your home, but also allow you to better understand the valuations real estate professionals make.

 

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