Two Tips For Understanding Home Valuation

Posted by Joe Manausa on Thursday, November 4th, 2010 at 11:55am.

Home Valuation PictureToo many homeowners do not know how to price their home to sell, so they are languishing on the market with no conceivable chance of being sold. The art and the science of home valuation is not nearly as tough as it seems, the key is understanding which trends to monitor and how to determine the strength of both the supply and demand for similar homes.

Home valuation is all about competition. We all love our homes and we all have a tendency to believe that our own personal homes are special, and to an extent, all of them are unique and special.

But to people who are looking to buy a home, it is all about supply and demand. Home buyers get to consider all of the houses on the market, and they are going to find the right home that fits their needs and budgets, and then they are going to try to get as good a deal as possible.

In order to perform a successful home valuation on a property, one needs first to think like a buyer. Understanding the process that a potential buyer will go through will better help a homeowner position the property best in the highly competitive market. A simple way to look at this is to first understand these two important points:

  1. Buyers select a price range
  2. Sellers select the competition

Home Valuation Tip #1: Buyers Select A Price Range

Consider the last time that you purchased a home. If it was in the past ten years, then most likely you started your search on the internet. The National Association of REALTORs conducted a survey of homebuyers last year that showed that 94% of buyers used the internet when buying a home. Why is this so important to know?

On most internet property search tools, the location is the first criteria used to reduce the list of homes for sale on the market, while price range is the second. This is very important to understand, as every dollar added to a home's asking price might just remove it from a homebuyer's property search. If you don't show up in the search, then your property will not get viewed and it certainly won't be purchased by the buyer doing the search.

Home Valuation Tip #2: Sellers Select The Competition

The initial result of most property searches online is a list of homes with a picture of the front of the home, most often sorted by asking price. The lower your asking price the better your home appears when compared to the rest of the homes on the list. The key to selling a home today is to get more viewings, both online and in your home, so home sellers must ensure that they are the most attractive home in the list of homes with the same asking price range.

Think about it. If you try to stretch your asking price (so you can get every last dollar out of your home), then the homes on the list appearing with yours will be nicer and more valuable, thus the likelihood of your home being chosen for a live viewing will be reduced. Fewer buyers viewing your home will most often result in fewer offers.

The Science Of Home Valuation

So how do you determine the range of values in which your home should sell? The answer depends on the direction of the market and the liquidity of the market in your particular price range.

If the housing market in your area is appreciating, all you really need to do is find recent home sales for homes similar to yours in size, amenities, and location, and then apply the appreciation factor to your property. If liquidity is abundant (meaning many sales have occurred in your price range), then you will be able to accurately determine the likely market value for your home.

If the housing market in your area is depreciating, you could find recent home sales for homes similar to yours in size, amenities, and location, and then apply the depreciation rate to your property. If liquidity is abundant (meaning many sales have occurred in your price range), then you will be able to accurately determine the likely market value for your home.

But if you are in a market like we have today, where both home values and the number of home sales is falling, you have to take a more aggressive approach. You have to do the home valuation as shown above for a depreciating market, but then you also have to closely compare this result against the current listings of homes for sale on the market. The rate at which homes are selling in your price range will tell you how you must be priced compared to your competition.

Use Home Valuation To Expose Motivation For Selling

For example, if 2 homes "like yours" are selling each month, then you need to be one of the top two best buys on the list of homes similar to your own. If not, you most likely will not sell this month. Not exactly rocket science, right?

But what if only two homes are selling each year (low liquidity), what do you do? The key is to ensure that your home represents the single best "deal" on the market in your price range. If you do this, you have the best chance of being one of the two homes that sell.

If you are unwilling to price your home this aggressively, you most likely will not sell and you should strongly reconsider putting your home on the market. If every "low motivation" home seller would leave the market, buyer selection would be reduced, and market forces would help stabilize prices.

Value movement is all about supply and demand, and right now, the real estate market has too much supply. If you are unwilling to sell your home for its current home valuation, then leave the market until values return or until your motivation to sell has been changed.

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

1 Response to "Two Tips For Understanding Home Valuation"

aspiring rookie wrote: Very well put Joe. Too many potential home sellers I have recently talked to are still thinking they can get more for their home. All they want to see is what they "wish" they could net when they list. They say things like," Well my house has 100 more square feet than the one that sold six months ago. I should be able to get 5K-10K more." The reality is that they need to price and compete with the smaller homes and use the 100 sqft to their advantage to pull traffic and get an offer. It is very tough out there right now.....I agree that sellers need to make their home more attractive to buyers by making it "the deal." It is also very important to price aggressivly when the home first hits the mls. Newly listed homes get a lot of hits from real esate agents that are working with qualified buyers looking for the deal of the month.

Posted on Friday, November 5th, 2010 at 2:04am.

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