This is for all the current and aspiring homeowners out there. How exactly is the price of a home determined? Perhaps you've noticed a home which seems to be a good price but no one buys. Maybe you've seen a home that sells for thousands above asking after just a few days on market. There is quite a wide range of factors that go into play, both on a macro and micro level. A book could be written on this complex system, but to make things simple we will look at the heart of the matter, what it really comes down to.
How exactly is the value of anything decided? Value, as with price, is subjective. In order to get the right price there must be an agreement between the buyer and seller. For the same home, someone may not even want it if it were free whereas someone else is willing to pay $400,000. In the simplest terms, value is in the eye of the beholder and therefor the right price is generally determined by that one person who is willing to pay more than anyone else (of those that know about it).
The value of a home will be determined by that buyer who wants it most, but before they show up, a decent price point must be set. Too high of a price will detract buyers, too low will confuse them (but definitely attract attention). A good price point is determined by looking at the nearby factors and recent comparable sales data. Most of the time finding a perfect comparable recently sold home is not possible. When I create CMAs (comparative market analysis), I look for the closest most similar house that sold within the last three months. Going too far back in history greatly skews price because home values can change very rapidly. If a comparable home was sold close by, it doesn't necessarily mean that the home in question is worth the same. Consider the following major factors:
What school districts are associated with the home and each comparable sale?
What years were the homes built? Generally home ages will be similar or same in the same or a nearby neighborhood, but not always.
Are there missing or extra rooms or features? You can determine how much a room or pool would add or deduct by comparing those with and without and noting the sold price differences. This is not an exact science, because many factors affect each home sale.
What were the circumstances of the sale? If it was a foreclosure and the home was trashed and needed a lot of repairs, obviously the price will be much lower than what it could have been in better circumstances and conditions. It's best to only compare homes that were sold in similar circumstances if possible.
Next let's look at the different perspectives, sometimes almost polar opposites, between buyers and sellers. Buyers will immediately scrutinize potential homes and look for defects and needed repairs. They are concerned with cost. Sellers want to spend the least amount and make the most possible. This creates difficulty which the real estate agent must masterfully negotiate. With a minimally invested sale, homes can sell for thousands less. Real estate agents must ensure that the home to be sold is in attractive condition, is highly presentable and that it is marketed through the best conduits pertaining. With that being said, home owners often want to list at a high price and buyers want it for less.
You may have noticed on various websites such as Zillow an estimate of home values. I have examined many of these estimates in cities all over California and have found them to be unreliable. Sometimes the estimates are fairly close to actual value, and sometimes they are off by tens of thousands. As of 2015, developers have failed to create a highly effective computer algorithm that measures all of the factors and generates consistently excellent estimates. For now, the best way to get an estimate is with good old brain power and common sense.
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