If you don’t know what to look for, it can be difficult to determine the fair market value of a home. The number of variables involved in valuing a home requires a holistic analysis that takes into account not only the features and location of the home, but also the state of the housing market, the motivations of the seller, and all other factors that can influence the value.
If you want to avoid overpaying for a home, make sure you take the following essential steps below:
Step 1: Analyze comparable sales
Look at the sale prices for homes in the area over the past 3-6 months that are similar to the property in question. If you are in the market for a single-family home, try to find recent home sales within one mile of the property (or up to three miles for rural properties) that are on a similar sized lot.
If you are shopping for a condo or townhome, units that have sold in the same building or development will make for the best comparable properties (aka comps) if they are available.
You’ll want to consider not only the sales price, but also differences in size, features, condition, location in a neighborhood (i.e. is it bordering a busy street or tucked away in a quiet neighborhood), location within a building, and more. Additionally, looking at how long properties were on the market before they sold will give you clues as to the amount of buyer demand in a given area.
Step 2: Investigate the reputation of the school district
One factor that has an outsized influence on the value of a home is the rating of the public school district that it is located in. Even if you don't have school-aged kids, the quality of schools is very important to many of the other buyers out there who you will be competing with.
Private school tuition can run tens of thousands of dollars per semester, so many parents will be willing to pay a premium for a home that is located in a sought-after public school district.
While it's somewhat risky to put too much emphasis on school districts, as boundary lines can change from year to year, it will have a big impact on the resale value or rental value of the home if you decide to sell or rent to a family in the future.
Step 3: Determine the total cost of homeownership
All else being equal, a home that has lower recurring costs in the form of property taxes, maintenance, energy costs, HOA or Condo fees, etc., will garner a higher sale price.
Make sure you are informed on all of the expenses involved in owning a home when calculating its fair market value. This is especially important if you are comparing nearby properties that are located across county lines, or in different condo buildings.
Step 4: Identify the motivations of the seller
If you can identify why the owner wants to sell, this can provide you with tremendous leverage in negotiating a better deal.
Maybe they already have another home under contract, and they need to sell their current home in order to close the deal. Perhaps they are relocating for a job in two weeks and they don’t want to carry two housing payments. Or maybe the home is being sold as part of a divorce settlement, and as long as they net a certain dollar amount, they’ll be satisfied.
Listing agents should really be keeping this private information, but you’d be surprised what you might learn if you just ask! And property owners who are listing their home as a for-sale-by-owner tend to be even more likely to share their motivations.
Step 5: Perform a thorough home inspection
A comprehensive home inspection will uncover potentially costly repairs and maintenance that can have a major influence on the market value of a home. You’ll also gain a deeper understanding of the quality of materials and craftsmanship used throughout the home.
If you must waive your right to an inspection in order to make your offer more competitive, a pre-offer inspection may be a viable option. This is typically not as thorough as a full inspection, but can still uncover major flaws in a home.
Lastly, get new construction homes inspected too! It’s not unheard of for contractors to take shortcuts, especially with electrical wiring and HVAC systems.
Step 6: Don’t worry about what the owners paid
What the current owners paid when they bought the home is irrelevant. Only the current market value matters. In fact there are some neighborhoods where homes that last sold in 2007-2008 are going for about the same price today.
Other considerations:
Do your due diligence if you have plans to build on the property
If you have plans to build a pool or make a major addition to the home, make sure there are no zoning restrictions or HOA regulations that would spoil your plans. While these might not have much of an effect on the current market value of a home, it will limit your options and the value to you personally.
Check the local laws if you have plans to use the home as a short-term rental property
If you have plans to use part of the home as a short-term rental to generate extra income, make sure this is allowed in your community. You don’t want to count on that additional income and then find out that it's not an option.