How Homes Are Valued: What To Know Before You Buy

Posted on: 26 November 2019

If you are in the market for a home, what sellers expect to be paid will become an important consideration. Buyers, for their part, need to know how much they can expect to be approved to borrow since most buyers need financing to close the deal. Upon beginning your home search, you might come across a few confusing terms when it comes to what a home is worth. Read on to find out more about the ways homes are valued and what that might have to do with the asking price on a home.

Using Comparisons to Set Prices

In all likelihood, the seller of the home you are interested in buying ended up setting their asking price based on the advice of their real estate agent. The price the sellers use is not pulled from thin air and it's seldom related to what the seller would like to see paid. Instead, the listing price may be the result of some intense research hours spent reviewing ending home prices by their agent. Real estate agents commonly use what is colloquially known as "comps" to help sellers set a price. Comps (for comparable) are, in short, the ending sales price of extremely similar homes.

More About Comps

So much is riding on the agent's research and the information has to be fresh, accurate, and fair. While the value of a home can be a more complicated issue, comps allow sellers (and even buyers) to compare the home in question to others that have recently sold. Naturally, key components of a home must match up very closely, if not identically. For example, comps between two homes — one already sold and one about to hit the market — might compare the following aspects:

  1. Location — The homes might be on the same street, in the same neighborhood, or in the same town, depending on the situation.
  2. Size — The square footage of the homes should match as closely as possible.
  3. Rooms — The bedrooms, bathrooms, and other rooms should match or be equivalent.
  4. Features — This area of comparison can be like comparing apples and oranges but as many features as possible should match. For example, an updated kitchen should be present in both homes but, if not, then another updated room should be present.
  5. Lot size — This should be approximately the same in both homes.

Using Comps When Making an Offer

You too can use comps as a buyer. The information used to determine comps is not top-secret and your real estate agent can perform the same service on a home for you if you are considering an offer. Knowing the comp allows buyers to make offers that hit the mark and result in acceptance. Speak to a real estate agent to find out more.

For more information about homes for sale in your area, talk to a real estate agent.