From replacing a rusted out bathroom sink to laying laminate flooring, Americans are hooked on the DIY craze. Some things, however, are better left to professionals. Establishing your home’s current market value before putting it on the selling block or pursuing a refinance is one of those things.
To determine its value, appraisers and real estate agents will compare your home (the “subject property”) to those that have recently sold in the area (known as “comps”). They will adjust the comps’ prices up or down, according to how similar each home is to yours.
Read on to learn how a home qualifies as a comp for yours.
The market value of a home is, simply, what a knowledgeable and willing buyer will pay it. This figure is reflected in the sales price of recently sold homes.
Appraisers and real estate agents use the local Multiple Listing Service (MLS) database in their research, to look for homes that have sold within the past six months. Only real estate licensees that pay an MLS membership fee will have access to this database, so a DIY consumer will find it challenging to locate a full and accurate list of sold properties.
Since location is one of the principal indicators of property value, appraisers and real estate agents seek sold homes that are in close proximity to the subject property. Some lenders give strict location requirements to appraisers, for example a comp in an urban or suburban area must be no more than 1 mile away, and rural comps no more than 5 miles away.
Real estate agents, on the other hand, have a little more leeway and will typically begin their research close to the subject property and then widen the area until they’ve found three comparable properties that have sold in the past six months.
Neighborhood characteristics that influence a home’s value include:
- Nearby parks
- Proximity to shopping
- Neighborhood condition
- Traffic, airport or other noise
- The quality of the school district
- Number of distressed properties in the neighborhood
- Declining values or oversupply of homes in the area
Price Per Square Foot
You may see sold homes or homes for sale that list the price per square foot in addition to the price of the home. This figure takes into account only the home’s square footage and nothing else. Because it fails to account for the diverse aspects and special features of the house, it isn’t an accurate reflection of value.
That said, with all other aspects being equal, a larger home will most likely sell for more than a smaller home.
Deferred maintenance will drag down the value of a home. Deferred maintenance includes all of the items you have been meaning to fix, but never got around to. Examples include:
- Leaky faucets
- Cracked windows
- Loose or missing hand rails
- Structural damage
- Overgrown landscaping
- Dirty or damaged carpets or other flooring
Since it is unlikely that your agent or an appraiser will find a home that’s identical to yours, he or she will need to make adjustments to the sold prices of the comps to account for the differences.
If the comparable home is inferior to the subject property, value is added to bring it up to par. Conversely, if the comparable is superior to the subject, value is removed.
Here’s an example of how this works:
The subject property has three bedrooms, two bathrooms and a pool. The comparable property, located three blocks from the subject, sold three weeks ago for $387,500.
The comparable property has three bedrooms and two and a half bathrooms, but it doesn’t have a pool.
The appraiser or agent will deduct value from the comparable for the lack of a pool and add value for the extra half bathroom. The amount to deduct or add depends on the value the local market places on items such as a pool or a half bathroom.
The adjusted price range of the comp will reflect the current market value of the subject property.
Determining a home’s market value isn’t rocket science, but it does require current, accurate information and some experience with the process. A professional real estate agent will not only determine the current market value, but will also give you tips on how to get top dollar for the home.