How Do I Know the True Market Value of a Home I'm Considering?

Dated: July 14 2018

Views: 105

Question: "I'm looking at a house that I think might be overpriced. What's the best way to know for sure? How do I know the market value of a home I'm thinking about buying?"

Let's start off with a quick definition, just to make sure we're on the same page. In real estate terms, the "market value" is the most probable price a home will sell for, based on local housing market conditions and recent sales activity. 

Notice that this definition does not mention the original price paid by the current owner. Unless they bought the home a month ago, the original purchase price is likely irrelevant to the current market. Likewise, the market value of a home has nothing to do with the homeowner's current mortgage balance. Many sellers list their homes for the amount needed to pay off the loan. This is wishful thinking, and nothing more.

How to Determine Market Value

So, with that introduction out of the way, let's get to the heart of your question. How do you know the market value of a home you're considering?

The first thing you need to do is track home sales in the area. The longer you do this, the better. It gives you a good base of knowledge with regard to asking prices versus selling prices (only the latter determines market value).

Next, you should look for sales data on homes that are similar to the one you're considering. This is what real estate agents refer to as comparable sales, or comps. The more similar the two properties, the more accurate the pricing comparison. 

Try to dig up as many home sales as possible. This will help you support your offer amount, by showing the seller you're using actual market value for homes in the area. You should lean toward the most recent data. Prices change over time, so recent comps will give you a better idea of what's happening now, in the current real estate market.

When you determine the market value of a home, you also need to take any unique features into account. For example, let's say I've found sales data for two colonial-style homes that are 2,000 square feet. The home I'm considering is also a colonial with 2,000 square feet. But it has a completely renovated kitchen, a pool, and sits on a more spacious corner lot with a great view. The other houses lack these qualities. So the house I'm considering will likely sell for more than the two comps, despite the fact the homes are similar in size and style.

Here's a good "formula" to keep in mind when considering the market value of a home in a particular area:

Comparable sale prices + unique features = a good asking price

If a homeowner uses this kind of logic when setting the asking price, the home will probably sell at or near the price they are asking. If they go over this amount, based on greed or the need to pay off their mortgage, the house will probably be on the market for a long time. This is why it's important to understand true market value before making an offer.

With all of this being said, real estate pricing is not an exact science. So if it comes down to a situation where the owner is asking a little over what you feel is the market value (but you really want the house), you might want to give them what they are asking. Especially if home prices are expected to rise in your area. 

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