What determines a home’s value?

Many buyers and sellers have a difficult time understanding why a home is worth what it is.  Or actually they have a difficult time understanding why a REALTOR says this is what this home is worth.

It is common for someone looking to make the largest purchase of thier life, or sell thier most prized asset to question the reasoning behind a proffessional’s report.

Let me try to shed some light on this. 

Real estate and the stock market are very much alike in most ways.  Their likeness is the way they are valued.  Buyers/Sellers typically take it that when a REALTOR gives them a value, that it is the REALTOR’s opinion.  In some ways this is true, and also false.

Let me explain.

An educated and proffessional REALTOR will do what is a called a CMA (Comparitive Market Analysis).  What?  A CMA is generally when a REALTOR takes information from the MLS (Multiple Listing Service) and breaks it down, consisting of comparable homes in the immediate area. 

The scary thing is, some REALTOR’s do not know how to do it effectively.  I mean no disrespect, but there are times when you see that incorrect comparables were used. 

An effective CMA should consist of not only the homes that are actively listed for sale (the immediate competition), but also properties that are under contract(pendings), those that have sold, AND…homes that have expired(thier listing agreement time period was up with their agent), and been withdrawn. 

The reason these are all so important is this.  If you only look at what is actively out there, you have no basis of what people are actually willing to pay for these properties.  Anyone can put a property up for sale.  But what will someone pay for it, is the question.  So by looking at pendings, you can see immediately what prices are bringing buyer’s attention, and by looking at solds, you see what was the bottom line(what were they willing to pay). 

But you can’t stop there.  There are a numerous amount of properties that you would never even know existed if you didn’t look at what expired and withdrew.  In many cases expireds sat on the market for an exhausting amount of time, years in some cases.  This is a major key in determining what people WOULD NOT spend money on.  And the same goes for withdrawn, they usually are not getting action as well, so the sellers decided to pull it off the market.

What an educated REALTOR will do well, is have a formula to implement all of these factors and be able to decipher within a tight range, what a particular property is worth. 

Now, understand that this is what it is worth RIGHT NOW!  It may change in a month.  Markets change all of the time, and if you don’t continously look at the factors going on, you will be priced out of the market.  This happens all of the time, a seller puts their home on the market, maybe priced at the top of thier range, and in a couple of months, the market has changed, and they are no longer even being considered.  When they finally realize that they must change their price, it’s too late, they are seen to many as a difficult property.  Many buyers will see it as either there is something wrong with the property, or the seller is difficult to work with.  In essence, what happens in many cases, the home eventually sells for much less than it should have, had it been priced correctly.

Remember when I said that real estate and stocks are alike?  What I meant by that is this.  REALTORS(like Stockbrokers) do not control the prices, it is the BUYERS AND SELLERS who determine the value.  REALTORS only report the findings.

Please let me know if you have any particular questions concerning this or any other topics, and I will be glad to help you find the answers.