There’s a short answer to this question that you’re not going to like: Your house is worth whatever someone is willing to pay.
While that’s not helpful to your current situation it is actually the key to understanding the ability to properly value a home. Professional real estate investors have a large array of tools and technologies available to assist us in determining a home’s value but what if you don’t have any of those things? What do you do as a homeowner when you want to determine what a fair value for your house is.
There’s a process and it’s not exceptionally difficult. But first…
Zillow’s “Zestimate” is not a realistic depiction of your home’s value.
Zillow is a fantastic resource for a lot of things, property values is not one of them. This a well understood fact among industry professionals. I can prove this to be true incidentally and I can use Zillow to do it. One of the data points that Zillow provides is historic purchases and their purchase price. As an exercise, please do the following:
- Go to Zillow and look up a house that you know has sold recently in your neighborhood.
- One of the tabs in the property details is “Price / Tax History” – note the sale price of the house.
- Now, compare the sale price of the house (remember, it needs to be recent) against the Zestimate.
Did they match? Of course not. In fact, was it even close? I’m willing to bet it was off by at least $10k and probably a lot more. This isn’t me knocking Zillow, that’s actually a really impressive thing for a computer algorithm to do and the fact that they get as close as they do is noteworthy. However, the numbers they provide are broad benchmarks and can’t be used when you’re trying to determine your home’s true value.
So now what? Here’s how you can value your house “for real”. The quickest and easiest way to determine the valuable of your house is to look at comparable sales.
Step 1: Find recent sales in your area:
What has sold in your neighborhood recently? Timing is absolutely key because of how often the Real Estate market changes. You’re looking for sale dates that are, at an absolute minimum, within the last six months and preferably the last three.
The other important note to this step is that “your area” means your immediate neighborhood. If you can stretch your geography a little and find some homes in the nice custom lots that isn’t going to do you any good because those properties aren’t comparable to yours. Make sure to find houses that are in your neighborhood.
Step 2: Look for model matches:
Homes can be categorized by a number of features. Each of these features can impact the value and projected purchase price of a house. The number of bedrooms and bathrooms, garage bays, floors (stories), available amenities, etc. will all have an impact on the value of the home. What’s really interesting in the world of Real Estate is that in many cases this impact because predictable.
While you might not be able to find houses that are exactly like yours in every way try to narrow your list down to homes that are similar. If your house is a 3/2 (three bedrooms, two bathrooms) start there. Try to narrow down your list to houses with similar square footage and basic home “offerings”.
Step 3: Narrow down your findings by quality:
Now that you have a list of homes you’re going to want to weed some out. Take a look at each listing and determine what the condition / quality of the home was when it sold. You can usually find these pictures online pretty easily, especially because its relatively safe to assume that the house was on MLS while it was for sale.
Take a look at some pictures of the house online and weed out any houses that aren’t comparable to your own. This means that if your house hasn’t been updated in the past 15 years you can’t use a home that has had a full kitchen remodel. The same is true in the opposite direction, if your house has had work done on it and you’ve done a good job keeping it up to date make sure not to comp against a house that needs some “TLC”.
Step 4: Time to do some math:
Now that you have a list of comparable properties we need to break down what these homes are actually worth. Hopefully you have at least three or four properties to work with, if not you might want to return to steps 2 and 3 and broaden your criteria a little.
For each house you need to find the price per square foot that was paid for the house. This is relatively simple math. If the house sold for $250,000 and it was 1,600 square feet then the price per square foot is: $156.25. Here’s the formula:
Purchase price [divided by] square footage [equals] price per square foot
$250,000 / 1,600 = $156.25
Do that for each house on your list. You’ll notice that the price per square foot is slightly different for each home. When you’re done, determine the average price per square foot by adding together each result and then dividing by the number of homes. For example, if your results looked like this:
Home #1: $156.25
Home #2: $149.50
Home #3: $160
Average = $465.75 / 3 = $155.25
The average cost per square foot for comparable homes in your neighborhood is $155.25. Take that number and multiply it by the number of square feet in your house and you have your realistic home value.
Things to look out for…
There are a number of “issues” you might encounter when you do this exercise. The hardest issue to deal with is data outliers. For example, using the data set from “Step 4” what would happen if you had a “Home #4” but its price per square foot ended up being $85? That’s a red flag that there’s something else at work and you should probably look at the house to figure out why it’s such a substantial deviation from the other homes.
Does it back up to a major road? Are there issues with the house that you can’t see in the pictures? Sometimes small things can actually throw off a home’s value in a big way. For example, in neighborhoods with cluster mailboxes, in some cases the home (or homes) directly in front of the mailbox experience a hit to their value because people don’t want to be next to an area that’ll have such a consistent stream of traffic. This is especially true for folks with children.
Here’s the important thing to note: you shouldn’t discount the home from your data set until you can figure out the “why”. What if, in this hypothetical scenario, homes 1 through 3 all sold five months ago and home #4 sold a week ago. If there’s nothing else wrong with it that single data set might be an indication of declining home values.
The same is true in the opposite direction. If you’re average price per square foot is rounding $150 and there’s a house that sold for $200 per foot make sure you find out why before you include it in your data. Otherwise you’re just setting yourself up for failure.
The sales pitch:
As always, if you need help selling your house please let us know. We can do immediate cash sales or traditional market sales. We’re the best in the business and we’re here to help you succeed! Contact us today for a free, fair cash offer on your home.
