Congratulations! After months of searching, you FINALLY found the perfect Cape Cod home for you and your family. But the list price seems a bit high. How do you know what the home is really worth?
First, let’s discuss the term “worth”. In most cases, a home’s market value is a range, not a precise number. You may feel a home is worth $700K while another buyer may be willing to go as high as $750K. Neither is necessarily right or wrong. Any given home could be worth more to one buyer than another. And if you’re paying cash, you are largely free to pay whatever you wish. But if you’re taking out a mortgage – especially one that is 80% or more of the sale price – the bank’s appraisal must agree with your offer.
The single most important factor contributing to a home’s market value is the recent sale price of nearby, similar homes. These are called the home’s “comps”. The more RECENT – the more NEARBY – and the more SIMILAR the comps, the more credible the market value range will be. Take a condominium complex where every unit is the exact same size and layout and where there have been numerous recent sales. The only variables in the market value of these units will be factors such as views and updates, which could be substantial, but are easy to identify and quantify. A neighborhood of 3-bedroom 2-bath ranches built by the same builder at roughly the same time will also have somewhat predictable market values. But a neighborhood of diverse styles of homes built at different times and with few recent sales could be a bit tougher and may require looking at comps outside the ideal parameters.
Although the sale price of good comps is the single most important factor, there are other factors to consider when determining market value. Homes that are under agreement can also be informative, especially if they sold quickly. A home that went under agreement quickly most likely will sell for pretty close to its asking price. A home that went under agreement soon after a price reduction may sell close to that price. A home that had been on the market at the current list price for more than a few months before going under agreement may sell for 4-8% less than the asking price. These are just general rules of thumb, but on average, they tend to be substantiated.
Nearby, similar homes that are currently listed for sale may also be considered, although it’s important to remember that these homes haven’t actually SOLD. So there is no validation that the home is worth its current list price. The longer the home has been on the market, the more likely it is that it is either overpriced, or has a relatively small pool of ideal buyers. If there is a nearby, similar home listed for $50K less than the one you’re looking at and even IT hasn’t sold, you need to look carefully at both to determine what might justify the price difference.
There are many other less significant factors to consider. What is the assessed value compared to the assessed values of the comps? Is there anything happening in the community that is likely to impact short-term value? You may also wonder about the Seller’s personal circumstances and motivation level. While these don’t really translate into market value, they MAY impact what the Seller is willing to accept. But in general, homes tend to sell for their actual market value.
Unless you have lots of free time on your hands and are very resourceful when it comes to real estate research, you should find a Realtor with whom you feel comfortable who can do all of this research for you, and at no cost to you. This Realtor would be your “Buyer’s Agent” and as such, owes you his or her complete fiduciary responsibility. If you are not already working with a trusted Realtor, I would welcome the opportunity to represent you as your Buyer’s Agent. To get started, visit my website and Register for an account. Or you can go directly to the Cape Cod MLS Search page and begin looking at available homes immediately. I look forward to the privilege of working with you.