What Determines a Home’s Value?
When it comes down to the nitty-gritty, your home is worth what someone is willing to pay for it. In a super hot market with several buyers bidding against each other, the value can escalate in minutes to thousands of dollars over the starting price.
In fact, buyers in some markets know they have to start thousands of dollars over asking price just to play in the game. Buying a home can get ugly as more buyers chase fewer properties in a market that seems to increasingly defy gravity.
In a normal market where the numbers of buyers and sellers are more balanced and homes aren’t selling before the seller finishes pounding a sign in the turf, the usual valuation rules apply. The five most important are:
1. Location is the most important component of a home’s value. The better the location, the quicker a home sells and for a higher price. In many areas smaller, older homes sell for unusually high prices because buyers can tear them down and build much larger homes. Location is the engine the drives these “tear-downs” and seller windfalls.
2. The condition of a home, of course, is important. The more a home tugs at the buyer’s emotional strings, the more money a seller walks away with. Conversely, a home that isn’t cared for will attract bargain hunters and sell for a big discount.
3. How hot the local market is has a big effect on the selling game. If there are more buyers than sellers, prices go up; the greater the imbalance, the faster homes appreciate. It’s also a double-edged sword. If you turn around and buy another home in the same market, you’ll also end up paying more and that tends to swallow your big gain.
4. Competition comes in many forms and can change quickly. For instance, a new subdivision next to you may siphon off buyers; a large, congestion-causing box store or highway re-route close to your neighborhood may lower home values. Also, there may be more homes for sale than buyers in your area at the time you want to sell. And there are interest rates and other economic factors outside of your control always lurking in the background that will affect your market.
5. Of course, price is a big part of selling a home and you have to stay within your neighborhood value range. But sometimes the gap between the lowest-priced home and the highest-priced home in an area can be as wide as the Grand Canyon, and that spells opportunity. It means you have more leeway to create emotional appeal and get top dollar for your home than if all the homes were roughly the same size and age.
Unfortunately, if a home isn’t selling, too many agents take the lazy route and tell the owner their price is too high when a few improvements could make a big difference. This leads to a downward price spiral until eventually the home sells and the homeowners lose several thousand dollars they didn’t have to. Incidentally, this is the situation this book strives to prevent in the coming chapters.
All of these home-selling economic components, and many subcomponents, are in constant play. When you put your home on the market, it’s like shooting at a moving target; conditions are constantly changing. Can you price it a little high or will that slow down the sale? Will replacing the carpet help sell it or will it be wasted equity? The next sections show how different approaches are typically used to establish a sales price.
I have a general question. The person who owns and is selling the home we are living in and repairing for her wants the master bathroom, which is quite large right now with a jet tub, cut down and turned into a bath and 3/4. This will make the bathrooms 8X6 instead of the 8X12 it is now. She believes that no one wants just one large bathroom with shower and tub. There is another 1/2 bath on the lower floor of this trilevel. We suggested a shower in this bathroom would make this a lovely master bath and an additional 3/4 bath on the lower level. She is an older lady and need for a professional to give her advise on this. I would appreciate an answer to this delema. It will cost her $6000 in labor and shower stall, another toilet, another pedistal sink, the only thing that will fit. All of the demolition of the floor, and sub floor, etc. As opposed to just adding a shower in the large bathroom and another in the lower bath. What would you do?