How To Tell If A Home Is Overpriced (And How To Negotiate)
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In today’s market, determining whether a home is priced right or overpriced is a little more challenging than it used to be. With prices having increased so much over the last five years, we still have many sellers looking for top value despite the market having cooled off.
Market Trends Shed Light on Home Values:
There are several things you can do to help determine if a home is overpriced or within market value.
First and foremost is to determine what the market trends are at the time of purchase. The best way to do this is to work with a Realtor who can research the market and tell you whether prices are declining, stable, or rising.
Other important market trend factors are the average list-to-sale price ratio and the average days on market.
It’s also a good idea to check the tax value to see how they compare to the asking price.
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Key elements to determining a home’s value:
Find out what, if anything, the seller has done to the home in the last five years that would impact the value. Keeping in mind that not all improvements necessarily add value to the home.
For instance, if the roof is at the end of its useful life and a seller replaces it, they can’t really expect to add that cost directly to the price.
Some updates that definitely add value would be kitchen and bathroom renovations, finishing unfinished areas to add more heated square footage, and, of course, major additions to the home.
Maintenance doesn’t really add value, but more saleability, and keeps the home from failing at inspection time.
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What’s the difference between a formal appraisal and a market analysis?
This is a question we are often asked by both home sellers and home buyers. A formal appraisal generally costs around $600, and a licensed appraiser would prepare this. They will visit the home, take photos, and then do a formal report. Then they will do a side-by-side comparison of other homes that are for sale, pending, and closed. They compare bedrooms, bathrooms, square footage, location, and any recent updates that would add value.
It is not necessary to have a formal appraisal before putting your home on the market or before a buyer makes an offer. Generally, a mortgage company orders an appraisal once a buyer makes an offer on a home.
This is for the bank to determine the value themselves to ensure they aren’t lending more than the home is worth to the buyer.
A market analysis is calculated by your Realtor to determine the home value. The selling agent will examine recently sold comparable homes, any updates made, and the home’s overall condition.
Taking all that into account, the agent will provide a recommended price.
With a market analysis, you’re allowed to negotiate the price with the agent until a list price is agreed on. However, with an appraisal, the appraiser determines the price, and there is little room for pushback.
The market analysis is a key element of making an offer.
Before Making An Offer
Prior to diving into a home offer, have your Realtor provide you with a comparable market analysis. This is something that can generally easily be emailed to you. While not as formal as an actual appraisal, it will be able to show you the same comps that an appraiser would use.
A market analysis will show you all the details of each home, including photos, as well as provide a summary report of all the comparable properties that reveals the average list price, sales price, days on market, and average list-to-sales price ratio. These factors are the most important in determining what price a home should sell for, giving you an idea of what to offer and how to negotiate.
Your agent can go to the seller’s agent with the market statistics to help support your offer, hopefully getting it accepted.
At the end of the day, even after all the homework and research you do, it boils down to what the seller is willing to sell for and what the buyer is willing to pay.
Even if you’re paying cash and there is no mortgage company involved, it’s always a good idea to add language in the contract that allows you to have an independent appraisal if you want to pay for it. You can also add language to protect yourself in the event that it doesn’t appraise for the sales price to either renegotiate or terminate.
Work with a Pro
Buying a home in today’s market can be overwhelming with things being so up and down. It’s crucial that you do your homework or have a Realtor do it for you before making an offer on a home.
Having a professional between you and the seller can help soften the blow of sharing some of this with the seller. Buying and selling a home tends to be an emotional decision for many and allowing the professionals to do the negotiating takes a lot of that off consumers. Realtors study, know, and understand the market and can help articulate things to the seller and their Realtor.
