So you've located a home that you'd love to buy, but aren't sure what price to offer the sellers. You're facing every homebuyer's dilemma: how to determine the "real" value of a property.
What determines home prices?
A number of factors may affect home prices, including:
- Sellers' motivation. If the sellers are moving because they've already purchased another home, for example, they're more apt to accept a lower price than someone who is simply "testing the waters."
- Condition of the property relative to the neighborhood. A professionally remodeled home will often sell for more than a similar one that has not been updated.
- The real estate market. In a hot market, where there are many buyers but few properties, home prices rise due to higher demand. In a slower market, where there are many more available properties and few buyers, prices often decrease.
Unlike many major purchases which have a specific price tag, homes sell for whatever amount the buyer and seller negotiate. Even houses that are similar, and in the same neighborhood, can sell for different prices.
How to estimate a home's value
Keep in mind the general definition of home value: what a buyer is willing to pay and what a seller is willing to accept.
To determine a general estimate of value, ask your real estate agent to prepare a Competitive Market Analysis (CMA) for you. This report will compare the home you're interested in with other comparable homes that have recently sold.
What amount to offer
Knowing the general value of a particular home from the market analysis provides you with the information you need to determine your offering price. Keep the local real estate market in mind as you make your offer.
- If your offer is too low, you may risk losing the house to another buyer. Ask yourself how disappointed you would be if the seller accepted a higher offer from someone else.
- Balance this by determining the highest price you’re willing to offer, which can help you to ensure that you don’t pay more than you want to.
- The general value of a home may differ from the appraisal of fair market value, which a lender will order after you and the seller agree on a sales price.
- Keep in mind that if the fair market value is lower than the sales price, your requested loan amount may be affected. Ask your mortgage consultant for more details.