All homebuyers have one thing in common: they don't want to get ripped off. Whatever the state of the housing market, but especially if it's frothy, it's especially important to make sure you get the right price. Yet, how do you know that you're getting a fair deal—even in a tight market—before you make an offer?
Here's how to evaluate the price of any home, so you could make a sound investment decision.
1. Recently Sold Properties
A comparable property is one that is similar in size, condition, neighborhood, and amenities to the one you're buying. One 1,200-square-foot, recently remodeled, one-story home with an attached garage should be listed at roughly the same price as a similar 1,200-square-foot home in the same neighborhood. That said, you can also gain valuable information by looking at how the property you're interested in compares in price to different houses. Is it considerably less expensive than larger or nicer properties? Is it more expensive than smaller or less attractive houses? Your real estate agent is the best source of accurate, up-to-date information on comparable properties (also known as "comps"). You can also look at comps that are currently in escrow, meaning that the property has a buyer, but the sale is not yet complete.
2. Comparable Properties on Market
In this case, you can actually visit other homes and get a true sense of how their size, condition, and amenities compare to the property you're considering. You can then compare prices and see what seems fair. Reasonable sellers know that they must price their properties similarly to market comparables if they want to be competitive.
3. Look at Unsold Comparables
If the house you're considering is priced similarly to homes taken off the market because they didn't sell, the house in question may be overpriced. Also, if there are many similar properties on the market, prices should be lower, especially if those properties are vacant. Check out the unsold inventory index for information about current supply and demand in the housing market. This index attempts to measure how long it will take for all the homes currently on the market to be sold, given the rate at which homes are currently selling.
4. Market Conditions, Appreciation
Have prices been going up or down recently? In a seller's market, properties will likely be somewhat overpriced, and in a buyer's market, properties are apt to be underpriced. It all depends on where the market currently sits on the real estate boom-and-bust curve. Even in a seller's market, properties may not be overpriced if the market is on the upswing and not near its peak. Conversely, properties can be overpriced even in a buyer's market if prices have only recently begun to decline. Of course, it can be difficult to see the peaks and valleys until they're history. Also, consider the impact of mortgage interest rates and the job market on the economy.
(Knowing your mortgage choices is important. For more information, read 4 Steps to Attaining a Mortgage).
5. For-Sale-by-Owner Properties
A for-sale-by-owner (FSBO) property should be discounted to reflect the fact that there is no 6% (on average) seller's agent's commission, something that many sellers don't take into consideration when setting their prices. Another potential problem with FSBOs is that the seller may not have had an agent's guidance in setting a reasonable price in the first place, or may have been so unhappy with an agent's suggestion as to decide to go it alone. In any of these situations, the property may be overpriced.
6. Expected Appreciation
The future prospects for your chosen neighborhood can have an impact on price. If positive development is planned, such as a major mall being built, the extension of light rail to the neighborhood, or a large new company moving to the area, the prospects of future home appreciation look good. Even small developments, such as plans to add more roads or build a new school, can be a good sign.
On the other hand, if grocery stores and gas stations are closing down, the home price should be lower, so as to reflect that, and you should probably reconsider moving to the area. The development of new housing can go either way: it can mean that the area is hot and is likely to be in high demand in the future, thus increasing your home's value, or it can result in a surplus of housing, which will lower the value of all the homes in the area.
7. Real Estate Agent Opinion
Without even analyzing the data, your real estate agent is likely to have a good gut sense (thanks to experience) of whether the property is priced appropriately or not, and what a fair offering price might be.
8. Does the Price Feel Fair?
If you're not happy with the property, the price will never seem fair, even if you get a bargain. Even if you pay a little over market value for a home you love, you won't really care in the end.
9. Test the Waters
Even in a seller's market, you can always make an offer below list price, just to see how the seller reacts. Some sellers list properties for the lowest price they're willing to take because they don't want to negotiate, while others list their homes for higher than they expect to earn, because they expect to negotiate downward, or they want to see if someone will make an offer at the higher price. If the seller accepts your price or counteroffer, you'll get an indication that the property probably wasn't worth what it was listed for, and you have a good chance at getting a fair deal.
On the other hand, some sellers may underprice their properties in the hope of generating lots of interest and sparking a bidding war. Unlike on eBay, however, the seller doesn't have to simply sell to the highest bidder; sellers can reject any and all offers that don't meet their expectations. If you have your heart set on the property, be warned that some sellers could be offended by lowball offers, and may refuse to work with you should you choose to employ such a tactic. Also, when you offer less than the list price, you may increase your risk of being outbid by another buyer.
(For strategies that will help you come out on top in any negotiation, read Master the Art of Negotiation
10. Get an Appraisal, Inspection
Once you're under contract, the lender will have an appraisal of the property done (typically at your expense) to protect its financial interests. The lender wants to make sure that if you stop making your mortgage payments, it'll be able to get a reasonable amount of its money back when it forecloses on your home. If the appraisal comes in at considerably less than your offering price, you may not be getting a fair deal. In fact, the lender may not even let you purchase the home unless the seller is willing to bring the price down.
A home inspection, which is completed after you're under contract, will also give you a way to gauge your offering price. If the home needs many expensive repairs, you'll want to ask the seller to make the repairs for you or discount the purchase price so you can make them yourself.
(For more, see Do You Need a Home Inspection?)
The Bottom Line
When you're shopping for a home, it's important to understand how homes are priced, so you can make a sound investment and reach a fair agreement with the seller. Using these tips, you'll be able to make a confident and well-informed offer on any home in any market.
(For more information on buying a home, see: First Time Homebuyer's Guide)