With all of the tools online today, it seems like it should be fairly easy to estimate the value of your home. Sites such as Zillow and Redfin use automated valuation algorithms called AVMs to estimate your home’s value. Using complex formulas, they look at several factors affecting the real estate market and try to predict your homes value.
However, they are not always accurate. There are nuances that many people are not aware of when pricing a home, and that software systems just cannot code around.
The CMA – A better approach to determine your home’s value
If you want to accurately determine the correct value for your home, you need to perform what Realtors® call a comparative market analysis or CMA. If you talk to any real estate agent about selling your home, they’re likely to show you a CMA that is quickly generated from the Multiple Listing Service (MLS). A CMA will show you the comparable sales, or comps, for similar houses in the neighborhood. However, even experienced real estate agents and appraisers, as we’ll show you later, can make mistakes in doing a CMA, and choose the wrong comps.
Why it’s important to get it right the first time
Having a bad CMA can be devastating. If you price your home too low, you loose money. If you price it too high, your house sits on the market, creating what is called a stale listing. When this happens you either have to drop the price significantly to create new interest from buyers, or take it off the market to try again at a later date.
Here’s eight tips to choosing the right comparable homes to determine the price of your home, the first time.
1. Use similar floor plans
Keep to similar size
The less adjustments you have to make between a comparable house and yours the better. Every adjustment you have to make opens the possibility of errors. To avoid this, keep your square footage, number of bedrooms and the number of stories similar. Look for homes within 10% of your home’s square footage and similar bedrooms and bathrooms. Let assume your home is 1,700 square feet with three bedrooms and two baths. To find your best comps, you want to find homes that are 3/2’s, and 1,530 to 1,870 square feet in size.
If you cannot find any 3/2’s in your neighborhood, you might need to look for four bedroom, two bath homes. However, determining how much an extra bedroom is worth isn’t an exact science. If you hire an appraiser, they’re likely to attempt to determine how much more four bedroom homes sell for than three bedroom homes to put a value on the price of a bedroom. Even then, it’s still an estimated guess.
Same number of stories
In keeping your comps to similar homes, make sure your comps are the same number of stories. A two story house attracts a different kind of buyer than a single story or a tri level home. Even within the same number of stories, floor plans can vary widely. If the home is two story, buyers will ask where are the bedrooms? Are they upstairs, downstairs or split? Where is the master bedroom? All of these subtle differences can impact what buyers are willing to pay for your home.
Similar age and construction
In choosing your comps, choose homes that are similar in age. Try to keep your comps within ten to fifteen years of your home. New homes often command a higher price than older homes. However, this is not always the case. Victorian, Craftsman or Mid Century Modern Homes may command a premium price, even over new homes in the neighborhood.
As you look at homes that are older, watch for technology gaps that might exist. For instance, homes built before the1960’s might have knob and tube wiring. If your home was built in 1961, you might not want to include a home built in the early 1950s, even though it is similar in age. Similarly, if your home was built in the last five years, you may have solar included, but homes just ten years ago probably didn’t.
2. Stay in the same neighborhood
It’s important that you don’t cross major streets, subdivisions, school districts or zip codes when choosing your comparable sales. The rule of thumb is to stay within a quarter mile of your home. However, even at this short distance you may be crossing major neighborhood boundaries. Sometimes, you may have to cross some major streets to get more comps, but this should be avoided if possible.
Real estate agents can get it wrong
Years ago I was negotiating to purchase a home through a Realtor®. The seller’s real estate agent gave me a list of comparable homes that included a home across the freeway from the house he was trying to sell. I had to remind the agent that an appraiser will rarely cross such a boundary. Unfortunately, for the seller his real estate agent had over valued the home by several thousand dollars by using this comp. The result was that the home sat on the market for months, creating a stale listing, before selling to me for a drastically reduced price.
So can appraisers
I’ve had similar experiences with lenders sending out of town appraisers to appraise a home’s value. I was selling a home in Stockton, CA and the buyer’s lender sent an appraiser from Fresno, CA (over two hours away). Because the appraiser was from out of town, they didn’t know the neighborhood. The result was we had to ask for a reappraisal from a local appraiser to challenge the first lender’s appraiser.
3. Use recently sold homes rather than homes listed for sale
When a home goes on the market in the neighborhood, do you get excited and want to know how much they’re selling for? Sure you do. Everyone is curious to know what homes in the neighborhood are worth. But what a home is advertised for and what it sells for are two very different things.
Use homes that have sold in previous six months
If you want to know the true value of your home, you must use homes that have recently sold, not ones that are listed for sale. An appraiser will typically use four to five similar homes that have sold in the past six months. They will then use these to determine the value for your home. They will often include one or two homes that are currently listed for sale, but only to show whether market demand is high or low. However, they won’t use the homes that are listed for sale as a indicator of what your home is worth.
I couldn’t buy a house today that I really wanted to buy
I had someone call me today asking if I wanted to buy their house. Their price was way over market value. When I asked what houses they had used for comps, I found they had violated everything we’ve said to justify their value. They crossed zip codes into different cities and school districts, and used houses listed for sale rather than houses that had sold. The result was they thought the home was worth twenty-five percent more than the market thought it was worth.
4. Avoid justifying why your home is different from the others
Chances are you really love your home. But, just because you love your home, doesn’t mean it’s worth more than your neighbor’s house that just sold. Emotionally we add value to our home that is purely relative. We think we have a nicer house than the one that just sold. We have a nicer… you fill in the blank. However, all of this is relative.
Leave your emotions out of it
While it may be true that some parts of our home are nicer than the neighbors, they may have things that are nicer than ours. If you want to get an accurate estimate of value for your home, try to ignore your emotions and just look at the numbers. Remember, every adjustment we make for differences, means the more likely our estimate will be incorrect.
That includes expecting a dollar for dollar return on improvements
5. Don’t expect dollar for dollar for improvements
It’s amazing how many times I hear homeowners say how much they spent on improvements when justifying the price they want to sell for. In our minds we justify overspending on improvements thinking we’ll get our money back if we sell our home. The reality is that even the best home improvement projects rarely return more than 75-80% return on investment.
Compare houses with similar improvements
The problem comes when we think that because we spent forty thousand dollars on upgrades, that the home is worth forty thousand dollars more than the neighbor’s home. Instead, what we need to do is compare houses with similar upgrades and improvements. If your home has a newer kitchen, use comps that have newer kitchens. If your home has a new roof, HVAC and windows use comps that have similar improvements.
6. Pools don’t always increase the value of your home
We have a lot of homes with pools in California. However, pools are a funny thing when it comes to whether they add value to a home. In some neighborhoods, pools are almost required. In other areas, pools are not desirable at all. Doughboy and other above ground pools, almost always have a negative value as many buyers see them as something they will need remove once they purchase the property. Even built in pools, contrary to popular opinion may not add value. I’ve seen appraisers give absolutely zero added value for a built in pools because the comps didn’t support adding any value for the pool.
How to know if a pool adds or subtracts value
To determine if a pool adds value to your home, compare two or three similar homes with and without pools. If these homes sell for close to the same amount, then the pools probably didn’t add value for potential buyers. If the homes are similar in every other way, but the houses with pools sold for more, take a note of how much more. The difference will help you estimate the value of a pool for your home.
7. Price per foot is not a good predictor
We all do it. We look at the price per foot of homes in the area and then use it to justify our price. However, every time I hear an appraiser speak, they tell me that I can’t use price per foot to determine value.
The problem is that the price per foot is inversely proportional to the square footage of a house. If a fifteen hundred square foot house sells for a hundred dollars a foot, it doesn’t mean a two thousand square foot home will sell for the same price per foot. Generally speaking, the larger the square footage, the less the price per square foot for the neighborhood. And in the same neighborhood, the smaller the house, the higher the price per foot.
Price per foot also doesn’t take improvements or upgrades accurately into account. It simply assumes all houses are the same regardless of number of bedrooms and size.
8. No two comparable sales are equal
You may have followed all of the above guidelines for determining value. Even then, there can be factors that may have impacted the price a buyer or seller was willing to agree to. Maybe the seller was being transferred out of state and needed to sell their home quickly. Maybe the home was an inheritance and the heirs simply wanted to receive cash from the home. Was there a recent death in the home? Was that a contributing factor to the selling price?
Not all factors are negative. Scarcity or specific floor plans can also impact what a buyer might be willing to pay. Two houses might have the same square footage and number of beds and baths, but still be a different floor plan. Even within the same neighborhood. Often, these differences are only known to local Realtors® or people intimately familiar with the neighborhood.
Avoid the outliers
If you find a comp that is priced much higher or lower than the majority of houses, you should probably exclude it unless you are absolutely sure of why it’s an outlier.
All of these factors can influence the price that a buyer and seller negotiate. However, a true comparable should be a home without any undue influence or adjustments for differences. Remember, you are looking for recently sold homes in your neighborhood rather than trying to use the prices of new listings in your neighborhood.