Home Price vs Value
Let’s break it down. Value, Price and Worth may not be the same thing.
I bought 2 pair of jeans a year ago. My now favorites and the other pair that are a little tight. (thought I was going to lose those 10 LBs) The initial price, value and worth was the same. My Fav’s have increased in value to me. The jeans in the closet are in new condition and have a higher worth and should get a higher price because most buyers would percieve them to have a higher value. Value and worth can be subjective and may not be the same as price.
How much is a House worth? Depends who you ask. Seller, Listing Agent, Tax asseser, Appraiser, Lender, Buyer’s Agent, Buyer. All of these people need to agree that Price = Value or “No Deal”. Number 1 rule in Real Estate is also #2 and #3, Loacation, Location, Location. We have all seen it… Same house less than a mile apart and the VALUE might be significantly different. Different School, Different Zip Code, Right Side of the Tracks or just it’s proximity to something of interest that increases desirability, Water Front, Down Town or Up Town, Transportation or View. So it’s not only what a Home is but what’s around it. Is the area stable or in transition for better or worse? They just decided to build a new school and taxes are expected to double in the next few years. So part of a homes value is subjective based on each persons perception of value. A Seller may have a very strong emotional value attached to the home that leads them to over value and then overprice their home. A Seller may price their existing home based on how much they believe they need to get their next home or pay off what they owe against the present home. A Seller may underprice their home because they need to sell, Relocated, Divorce, Birth or Death and want to undercut any competition for a quicker sale.
A Buyer will bring their own subjective values and motivations influencing their perception of value that will determine a homes worth to them. These factors will play into the initial offer and negotion of the purchase. Perhaps your rent is going up 20% or the home you rent was just put up for sale or is going into foreclosure, your getting married or divorced or you need to be in the new school district to get the kids registered for school. These outside things may affect your motivation. We have talked about Buyer and Seller “Motivation”. We have talked about “Location” Let’s talk about the actual house and about idividual perception of value. For example you may have a home that the Seller has upgrade with a lot of tile.You may hate tile and want hardwood floors. The Seller loves their tile and puts it on the plus side and you see it as a $10,000 renovation to replace the tile with hardwood and have it as a minus. This could be paint, carpet, paneling, kitchen, bathrooms, wall paper and the list goes on… We’ll call this “Decor”. Next let’s talk about “Structure”. Structure may be defined as the home itself, you need 4 bedrooms but the home has 3. You may consider using the office in the finished basement or perhaps finishing the attic to add the needed bedroom. You may consider adding a garage. So does the home meet our needs and wants. You may need the 4th bedroom but want a fireplace. “Condition”, does the property suffer from deferred maintenance, structual issues or need repairs/replacement of roof, heating/cooling, electric or windows. Condition may include Decor items like carpet that needs to be replaced because they are worn out not because we don’t like the color. You will need real estimates of the cost to cure or budget for future repairs and improvements.
Is the home perfect? It is rare to find the perfect home. Be realistic in your expectations. If you can find a home that meets 85% of your wants and needs I would move it to a potential purchase for futher review.
Let’s review. You have a few potential homes that meet 85% or more of your wants and needs so let’s re-cap; “Location”, “Motivation”, “Decor”, “Structure” and “Condition”. After review you find that 2 homes really stand out.
What now? The Seller has set an initial asking price and we need to determine an offer price. We don’t really know what the seller’s price or value is based on. We have an idea of what we feel value and price should be. Hey if we can get a price below our percieved value that feels like a good deal, but is it really, how do we know?
A general thought is that a home’s worth is what a Buyer is willing to pay! I guess if you’re paying cash that may be true. Although there is much truth to that it’s not the whole story. Value, and Price are not necassarily Worth. If you decide to get a mortgage the Lender/Appraiser will determine Worth. They don’t care about the Seller’s or Your Value. The Lender doesn’t care about the Price as long as it is at or below the Appraisal. The lender only cares that the home is adequate collateral for the NOTE. (check out the “APPRAISAL” section for more details) The appraisal happens after the offer so we need a sneak peek before we get there.
How do I get a sneak peek? Comparable sales. The appraiser is going to pull the same information available to you and your Buyer Agent. Before ever making an offer you need to look at the “comps” (comparable sales). It is not as simple as saying that 3 homes on the same street, the develpment across the street or in the text town sold for $$$,$$$. They should be comparable homes (town house to a town house, rancher to rancher), Size matters so if adjustments that are too large up or down it may not be an acceptable comp. (1000 sq ft home compared to a 2200 sq ft home, rough estimate is $25 per sq ft), Number of Bathrooms and Bedrooms (full bath might be 5,000 to 10,000), Slab vs Basement (10,000), Finished vs unfinished Basement ( 5,000 to 15,000), Garage (5,000 to 10,000 per car), Fireplace (1,500 to 2,500), Central Air (5,000 to 10,000), Condition, Site, Water& Sewer, Heat Type, Land and many other differences could be adjustments. Adjustments vary greatly based on location, style, quality and to some extent appraisers opinion. Comps should be as close to the subject property as possible and you can’t just skip over several similar homes that were a block away and use comps from 1.5 miles away just to justify a higher or lower price. (in a more rural setting you may have to go 4 miles away to find a recent comp) More recent comps carry more weight, again you can’t skip the home that closed last month and use a comp from 1 year ago. (less than 6 months are favorable). You may also look at pending and listed properties to see how the market and competition may influence your price. This will give you the price that others have paid for similar homes. NOTE: If seller assists are frequent on comps they may be adjusted from value. ( sold price 205,000 with 6,000 assist on appraisal would be 199,000) Large or consistant Seller assist indicates a weak or decling value to the Lender! A unique home can be tough as well… try to find 3 comps on a Log Home. This is as much an art as a science but should give you a decent range where the home value is or what it’s worth. Now we can look at the Seller’s price and see if they are overpriced or aggresivly priced. I know there are books and people that say you offer 10% or some set percentage off of asking. Ridiculous! What if they are 20% overpriced or 15% below appraised value and now you end up paying too much or maybe lose the house because your offer was too low and someone else grabbed it at a great value! There are so many variables that it can be difficult so it can be very beneficial to have a good Buyer Agent to help you. Once all your homework is done it may be apparent that based on all the info that property A is priced well and the Seller is showing signs that they are very motivated and may be flexible, Property B is over priced and they mentioned while walking through that if they don’t get close to their price they will just rent the home. Both nice homes that meet your needs but A would be the clear choice to make an offer on.
Great, you have been pre-approved, you have covered your wants and needs in a home, found a home and done you homework and you believe you have found a winner. Let’s take a quick look at the appraisal.