There are some things that affect the value of a home and some things that do not. Here is a list of some of the things that do have an impact on value:
1. Location – The very same home in one neighborhood will have a different value in another neighborhood. Even which block a home is on has an impact on the value.
2. Condition – The condition a home is in has a huge impact on the value. Buyers will sometimes off thousands less for a few hundred dollars in needed repairs. They don't always understand that cost of repairs so it isn't unusual for them to offer $5000 less when the home needs a repair or udate that costs $1000.
3. Size – When appraisers or Realtors put a value on a home we use the square feet of finished living space. No all space is equal. Finished square footage in a basement with no egress windows does not have the same value as finished square footage on the main floor.
4. Amenities – the number of bedrooms, baths and garage stalls.
The four I listed are the basics. Here are some things that do not impact the value of a home:
1. How much the last owner paid for it.
2. The value as listed in Zillow or in the tax records. Although I do have a theory about Zillow. As the site got started and gained traffic home values went down nation wide. It is just a consicidence but it would be nice to have just one person or company to blame for declining home values.
3. How much the current owner owes on it.
4. The cost of repairs made to the home. When it comes to big ticked items like roofs, the sad truth is every home needs a roof and buyers expect one. Putting on a new roof if one is needed will help sellers get the most for their home.
5. The value of the home in 2005, or even last year.
It gets a little tricks with improvements. Lets say there is a $100,000 dollar home in a neighborhood where the average price is 100K and the owner puts in a 50K kitchen. In most cases that does not make the home worth $150K. It will increase the value of the home but there isn't always a direct dollar for dollar relationship.
Sellers can price a home at any level they want to but if it is priced too high often buyers will ignore it. Appraisers are being very conservative these days which means that the home may not appraise for the around of money that the buyer offers. When that happens some times the buyer can not borrow enough money to buy the home.
Pricing a home is more of an art than a science. In general we look for three comparable homes that have been sold in the area in the last twelve months.
The amount of money that a seller can get for a home or the amount that a buyer will pay is also affected by a basic economic principal. Supply and demand. Currently there is a demand in St. Paul for homes that have 2000 square feet or more of finished living space, at least three bedrooms, two baths and a two car garage. Last year at this time there were plenty of homes on the market that met that description, this year we are seeing multiple offers on homes that meet the general criteria and are in good repair.
Buyers should have their agent do a price analysis before they make an offer. They should also look at as many homes as they can on and off the internet. Comparative shopping is important. Sellers should pay close attention to what other homes in their area actually sold for, not how much they were listed for.
When all is said and done a home is worth exactly how much someone will pay for it. Buyers drive prices, not sellers or their Realtors.
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Great post, I especially agree with you on #1 (what the owner paid for it). I’ve had buyers wanting to make an offer based on that alone. In my mind the price an owner paid for the home in an up or down market is irrelevant, as the market value has nothing to do with it.
One more I’d like to add to the list:
The amount that the buyer is willing to pay is one side of the coin. The other side of that coin is the amount of funds that buyer has access to.
PB – I am not sure how that affects the price. There will be buyers who can not buy a particular home for one reason or another. if no buyer had access to enough funds to buy it then yes that would affect the value and make it some where around zero I think.
Hi Teresa:
good post – simple straight forward and to the point.
i might add a #6 to the things that DO NOT effect value:
how much the seller needs to buy his next home?
i think you will appreciate that one?
it is kind of tied to your #3 but i know most agents have heard my #6 many times.
cheers from rainy SF Peninsula.
Arn
Teresa-
What I mean is that when interest rates rise, or downpayment requirements change, the amount of cash that most buyers can muster is changed.
For example, assume that you have 10 buyers, each of whom have $10,000 to put down (ignore closing costs for now).
In a 5% down environment, they can all purchase a $200k house.
Suppose that downpayment requirements rise to 10% for that group of buyers (market conditions). Now they need to find another $10k, or find a $100k house. It takes time to save $10k, of course. (Or, we can steal it from future taxpayers, see below.)
The sellers that counted on those buyers are now out of luck. That is ten buyers that are GONE, unless the price of the house is reduced.
Since nearly everyone finances a large percentage of the purchase price, the downpayment requirement has a multiplying effect on the amount of money they can afford to hand over in a transaction.
We need to remember that a large part of the problem we are in is due to low-downpayment buyers. So the medicine, apparently, is the same as the disease.
Also, remember that in order to keep this environment going, it will cost taxpayer dollars to subsidize rates or other programs that allow marginal buyers to continue to qualify.
This may make some people happy, but it is not free.
Someone must pay for it. Government money to subsidize this will be borrowed from foreigners and repaid by our children.
PB – very trued. what you are describing is can happen during a recession or depression. seems like for at least a decade now people don’t have cash any more.