How a Realtor Determines Real Estate Market Value
I have written numerous articles on how to determine real estate market value, so today I thought I would try a fresh approach on this critically important topic by interviewing one of the top agents in the US.
If you were to ask 1,000 real estate agents around the country for the most common mistake that home sellers make, they would tell you something relating to the asking price of their home.
The fact is most homes on the market are improperly priced and this mistake typically ends up costing the home seller tens of thousands of dollars, as well as ruing the time schedule that the home seller wanted to attain.
Aggravation and loss of money, that's what you get when you try to sell a home that is improperly priced, so continue reading and learn how to avoid the pain.
I have been preaching for years about the need for home sellers to interview multiple agents for the job of selling their homes, so I am going to make it a bit easier and start that process for you right now by reaching out to see what another real estate agent outside of the Tallahassee real estate market has to say. With today's article, you get two agents with more than 50 years of combined experience discussing the home valuation process!
Welcome Bill Gassett
I didn't have to put a lot of thought into who I'd bring in to help us on this issue, as I regularly communicate with the top listing and selling agents in the US.
I reached out to Bill Gassett, a top Milford Massachusetts real estate agent who has been in the business for nearly three decades and I knew that he would offer intelligent guidance.
Bill Gassett: Joe thanks for taking the time to ask for my advice. In real estate, the way a Realtor typically determines market value when selling a home is to prepare what is referred to in the business as a comparative market analysis (CMA). While there are other valuation methods, this is the most common one used when evaluating a typical property.
Me: Perfect. It sounds to me like things aren't so different in real estate markets that are more than 1,000 miles apart.
Question: What Goes Into A Comparative Market Analysis?
There are some basics to a comparative market analysis that every real estate agent should follow. This may sound silly but when you are comparing an analysis the properties really should be "comparable". For instance a ranch or split level home is not comparable to a colonial. These are two completely different styles of homes. There is nothing similar about them. Yet after being in the business for many years I have seen other real estate agents who try to compare properties like these to one another. What this does is put confusion into the mind of the consumer. In our industry I find one of the biggest weaknesses among agents is knowing how to identify value properly. If this wasn't the case you would never see so many properties daily that need price reductions even in stable markets.
Yeah, we see that here too.
A sloppy approach at property selection yields an evaluation that is no better than a Zillow Appraisal. How do you ensure that you start off on the right track?
The number one step in starting the comparative analysis is picking like properties. A Realtor should be choosing apples to apples. Keep in mind that homes stylistically do not have to be identical but should be in the same family. For example comparing a Colonial to a Cape would be far more acceptable than comparing to a contemporary. The styles of these homes would be too far off to draw any meaningful conclusions.
OK, you make sure property types are compatible, then what?
Once you have gotten the style down properly there are a few pieces of data that a real estate agent should be looking at when putting their comparable market analysis together. These would include most similar sold properties, homes that have gone under contract but are not yet closed and homes that are currently for sale. It should also be emphasized that the more recent the data the better. Most real estate appraisers will tell you that comparable sales data outside of six months should not be used. Markets can change and fluctuate so you want the information to be as fresh as possible.
Agreed. It's hard to call information older than that "current" when a home that closed six months ago is likely the result of a buying decision made eight or nine months ago. A seller today should not care where the market was nine months ago.
So which piece of information do you typically lean on the most in your valuations?
Each of these three data points have varying degrees of importance within the determination of value. A sold property is absolutely the most important piece of data because it is tells us what someone is willing to pay for a like property. Pending sales data gives you a good indication of value as well because the home has gone under agreement more recently. The only drawback to a pending sale is that on most occasions a Realtor will not know what the property sold for until it closes. The last piece of data is homes currently for sale. This is the least important data point when determining market value. Unfortunately this is where the vast majority of real estate agents also make a mistake when assessing a homes value.
The problem with looking at homes for sale is that the price can change at a moments notice. You also never want to hang your hat on what someone else thinks their home is worth. This is why sold data is the most important piece of a comparable market analysis.
I believe I once heard this explained as "sold" information is "reality," while "for sale" information is "fantasy land." Only homes that have been sold have been validated by the buyer side of the market.
Bill, how does a home's characteristics come into play when you are determining real estate market value?
One of the things about a comparative market analysis is that there is some degree of subjectivity involved. Certain amenities in a home have varying degrees of value to different people. For example some buyers may want a swimming pool and may pay a little extra to get one with a home. Another buyer could be completely opposed to having a swimming pool and might even offer less for a home factoring in that they will need to remove it.
OK, so do you have a key list of home features that you think factor into every home valuation?
Generally speaking there are some steadfast and true amenities that a real estate agent will look at when trying to compare one property to another. Some of these things include the following:
- The number of bedrooms.
- The number of bathrooms.
- The square footage of the home.
- Is there a garage.
- The age of the home.
- The condition of the home.
- The amenities in the home - for example does the home have central air.
- What are the kitchen and baths like.
- The location of the home.
- How nice is the lot and what's the size.
- How nice is the neighborhood.
OK, that's fairly comprehensive, and I guess your thoroughness is ample evidence that online valuation tools just cannot (yet) truly come up with a market value for home sellers.
So what do you do with this information?
These are just a few things that can sway the value of a home either positively or negatively when comparing one home to the next. Creating an accurate comparative market analysis is really a skill on the part of the real estate agent. You really need to know how each of the above variables will impact the final projected sale price of a home. All of these things can also vary by location as well.
For example have a swimming pool in the South is probably a lot more valuable than in the Northeast when you can only use it for a couple months out of the year.
The real estate agent will also need to assign a dollar value to a number of these items to arrive at a final home value. Here are some examples of what Realtors have to think about while putting together their comparative market analysis.
- How does having 3 bedrooms vs 4 bedrooms in the same size home impact value?
- To what extent does having a extra bath add to a home’s value?
- What's the difference in value of having a one car garage versus a two car garage?
- What's the difference in value of being in the top rated neighborhood versus one that's considered average.
- How much value is added for a kitchen that has custom cabinetry, granite counters and stainless steel appliances vs just your average Joe non updated kitchen.
- What is the value of having an additional acre of land?
- What is the added value of being in the best school district or close to the center of town or having great highway access?
Bill, I think you've given us some great insight into developing an accurate comparative market analysis. There is a lot of skill involved, and thus home sellers should ensure they are working with a well-trained, experienced real estate agent.
Is that something you have found to be true in Milford?
One of the things homeowners rely on is being provided accurate information. When a consumer sits down with a real estate agent the last thing they want is to be mislead. They are counting on us to give them an accurate assessment of their value. Does this always happen? Of course not! Sometimes this is simply a case of a Realtor not being skilled in the art of market evaluations and other times it is purely a case of the Realtor misleading the seller.Seriously, not all real estate agents will be honest with homeowners? Why would a real estate agent purposely mislead a home seller? That's simple. The real estate industry is ultra competitive.
Every real estate agent wants to win the listing interview and sign up their next seller client. Homeowners also want to believe their home is worth more than the neighbors identical home. These two things colliding make for a lot of bad real estate agent selections. Unfortunately in the real estate industry, Realtors "buy listings" all the time. These agents either believe they will be able to get a price reduction at some point and the home will ultimately sell. Some agents will just use the listing to gain additional business via buyer calls. Frankly this is one of the worst parts of the business.OK, so what does a seller do to ensure they are not being deceived?
As a seller looking over a comparative market analysis presented by various agents, you should keep one thing in mind - real estate data never lies, people do! Look over the information provided, just as your future buyer will do. Do the homes you are being shown look comparable to yours? If an agent tells you your home is worth $25,000 more than what you thought it was worth or what other agents have told you, make sure you understand how they are justifying the additional value.
Gotcha. Bill, I think you have really provided a great guide for determining real estate market value.
Thank you so much for spending the time to give us a multi-market perspective of the home valuation process.
Hopefully you are getting a better understanding of how a Realtor determines real estate market value. Pricing a home properly out of the gate is the #1 tool in selling a home. All the marketing in the world will not sell an overpriced listing. Price your home according to an accurate market analysis and you will be well on your way to having a smile on your face at a closing table. Best of luck!
So you're saying "you can't sell a nickel for a dime!" Of course not!
Bill I want to thank you so much for sharing your time and your thoughts with us. It's funny that even though our market areas are roughly 1,200 miles apart, the fundamentals of determining the market value of a home are really the same. Some of the underlying data will be different, but the process works the same.
I hope by providing an outside expert we have been able to communicate this critical issue in a more clear light.
For all of our readers who might be interested in a specific real estate market value, just drop me a note and we'll reach out to you to schedule a time to help you.
This information was extremely valuable to me! I love the way you organized it and stagger the questions.
Thank you for taking the time to comment Kathleen!
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