Two things to consider in valuing a home:
- How does it compare to similar nearby homes that have sold recently?
- What value do you place on the advertised features and amenities?
The Zestimate® home value is a good starting point in figuring out the value of a home. It shows you how the home compares relative to others in the area, but you then need to add in all the other qualities that only someone who has seen the house knows.
Looking at "comps"
Knowing whether an asking price is fair will be important when you're ready to make an offer on a house. It will be even more important when your mortgage lender hires an appraiser to determine whether the house is worth the loan you're after.
Check on Zillow to see recent sales of similar, or comparable, homes in the area. Print them out and keep these "comps." You'll be referring to them quite a bit.
Note that "recent sales" usually means within the past six months. A sales price from a year ago probably bears little or no relation to what is going on in your area right now. In fact, some lenders will not accept comps older than three months.
Market activity also determines how easy or difficult it is to find accurate comps. In a "hot" or busy market, you're likely to have lots of comps to choose from. In a less active market finding reasonable comps becomes harder. And if the home you're looking at has special design features, finding a comparable property is harder still. It's also necessary to know what's going on in a given sub-segment. Maybe large, high-end homes are selling like hotcakes, but owners of smaller houses are staying put, or vice versa.
Who: A brother and sister were looking for a house to buy together in Honolulu a few years ago.
Circumstances: They wanted a place with room for their mother as well as for the brother and his wife to live.
The house: They found a good candidate near the university, tucked away with a few other small homes in an area surrounded by mid-rise apartment buildings.
The dilemma: Their agent (and, later, the bank's appraiser) had a difficult time finding comparable properties. Even though the housing market in Hawaii was jumping, none of the other small, older homes in the neighborhood had been sold recently, and no others were being offered for sale. However, the siblings had been house hunting for several weeks and believed the asking price was fair.
Solution: The bank's appraiser had to search for sales in other neighborhoods of about the same age and to make a number of allowances in order to place a value on the house. As it happened, the final appraised value was quite satisfactory to the bank.
The elements most critical to an accurate comparison are:
- Area or location. Although the ideal comps will be right in the same neighborhood as the house you're interested in, it may be necessary to go farther afield to a generally similar neighborhood with homes that were built at about the same time. The more familiar you are with the characteristics that distinguish one neighborhood from another - and the more familiar with the housing market in these areas - the better you'll be able to judge whether the comps are truly fair comparisons.
- Amenities. Does your target house have a pool? A great view? An extra, or "bonus," room, such as an in-law or guest suite?
- Size. The number of rooms, the total square footage of the house, the size of the garage and the size of the lot all make a difference in finding good comps.
- Age of the house. Generally, appraisers like to compare homes of similar age because they will usually have similar amenities. (Of course, a house built in 1950 and completely remodeled in 2009 is not strictly comparable to a house built in 1950 but never remodeled.
Sometimes, unknown or unexpected circumstances can skew prices:
- If a home sale was the result of a divorce or death, for example, the seller(s) might have accepted a lower price just to get the deal over with. If the sale price of a comp looks unusually low (or high), see if you or your agent can find out more about it.
- Factors well beyond your control - actions by the Federal Reserve Board, national and international events (elections, wars, oil prices) can cause housing prices to rise or fall significantly in a matter of weeks. While it's tempting to think you might be able to "time the market," it's probably better just to roll with the punches and accept that last month's buyers' market is gone and sellers have the advantage.
What's it worth to you?
If you're working with an agent, you may find yourself experiencing some upward pressure: "Yes, it's priced a little higher than you were looking for, but it's got [pick one: an extra bedroom, a really great backyard, a family room, a pool]."
To be fair, first-time buyers, and even experienced buyers, can apply this pressure all by themselves: "Gee, look at this one: For just a little bit more we could get ..."
Amenities such as new wall-to-wall carpet or a swimming pool might be a real selling point for some buyers. If you're not one of them, you need to make this clear to your agent.
For one thing, you'll establish that you're serious about your budget. It will also help the agent negotiate for you later. The new carpet is actually a negative if you'll want to tear it out to get to the hardwood floor underneath.
Also, be sure to compare the listing description to what you see. Is everything there that was promised? Do those new appliances come with the property, or are they leaving with the seller? This can mean the difference of several thousand dollars in upfront costs to you.
Question anything that's not clear. Sometimes a listing will say something like, "square footage doesn't match tax records." What does that mean, exactly? Is there an addition that was made without permits, for example? That might be OK for now, but how will that affect the resale value of the home?