For most buyers, it starts with what's known as comparable properties, or comps. In theory, a seller could price their home however they please -- but comparative home research allows an educated buyer to place the real value of a home within a reasonable range. If you're working with a real estate agent, they will compile their comp research into what's known as a Comparative Market Analysis (CMA).
These reports break down three important considerations: recently sold properties, on-market properties (i.e., asking prices of unsold homes), and off-market properties (i.e., pending sales). The most important of the three is always sold properties, because this will give the best sense of what people are willing to pay for similar homes.
Comparable properties should be similar in size and type to your home, sold preferably within the past six months to a year, and located within a set distance (aim for a half-mile or less). You'll want to find about three to six homes to form a basis for comparison.
Unfortunately, the most effective tool for finding comps in many areas, the local Multiple Listing Service, is only available to real estate agents. This is just as well in some cases, as first-time homebuyers should seriously consider consulting with an agent before tackling the market on their own. There are, however, certain websites that can provide enterprising buyers with a rough estimate of local home prices. Keep in mind, though, that these figures mainly draw from public sales records and may not always portray an area in the most accurate light.
More Art Than Science
No home is exactly like any other, despite our best efforts to compare homes as apples to apples. This can be especially true in the current market, where recently sold comps are harder to come by.
"There is fashion involved, in a sense," says New York appraiser Alice Palmisano. She looks at everything from the ceiling heights and type of flooring, down to special architectural flourishes and the general "flow" of the room. "I look from the perspective of the buyer," she says. "It's very subjective. People fall in love or they don't. I'm looking for what's appealing in the market, and for things people think they'll have to fix up.
While some buyers may be willing to pay a premium for certain amenities, it doesn't mean that all improvements in a home will suit your particular needs or tastes. "What good is a $50,000 gourmet kitchen if you don't cook?" asks Rob Hahn, a Texas-based lawyer and real estate consultant.
Also keep in mind that those less-than-desirable amenities will become your responsibility to either maintain or replace, should you choose to purchase the home -- a financial burden that house hunters should take into account when shopping around.
A Word of Caution
When securing a mortgage on your home, it's ultimately up to your lender's appraiser to determine what the home is worth. Since the housing bust, appraisers have been particularly conservative with their estimates to avoid the kind of unreasonable mortgage debt that got many Americans in trouble during the boom years. Similarly, high concentrations of foreclosures in an area -- an unfortunately common occurrence in today's market -- can also skew appraisal values.
While it's important to do your homework before placing an offer on a home, know that the amount you'll ultimately be able to borrow is contingent on this appraisal. If it falls short of the established price, you can opt to pay the difference out of pocket, renegotiate the price, or walk away.
Whether you choose to consult with a real estate professional or go it alone, it's useful to get a leg up on research. Searching for home valuation estimates online is a good way to start the process, but keep in mind that numbers only tell half the story. At the end of the day, nothing beats hitting the pavement and visiting the homes in person.
Also see these videos:
Inside the Mind of an Appraiser
Real Estate Appraisals 101
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