One of the trickiest aspects of buying and selling real estate is assessing property value. In general, there isn’t a hard and fast rule to calculate a home’s value. And, there isn’t even consensus regarding the specific factors that should be taken into account when making an assessment. Real estate markets are local in nature, and factors that may be pertinent in one locale may be wholly inapplicable in another. Obviously, the method of evaluation for real estate in a densely populated urban area differs quite a bit than one for rural acreage.
Nonetheless, for homes in most urban and suburban areas, real estate agents employ the comparable sales approach. This is generally the most common, and according to most real estate professionals, the most accurate method to determine the value of single-family homes, condominiums, and smaller rental buildings. Even though homeowners can try to make this assessment on their own by utilizing tax records and the internet, it is advisable to seek the assistance of a real estate agent who has access to the local Multiple Listing Service (MLS). The MLS is a database that condenses information regarding real estate transactions for a particular region of a state. A great deal of the information available in the MLS is not available on other websites.
So, what will seasoned real estate agents do to assess a property’s value? There are a few key items that they take into consideration. Everyone knows the real estate mantra of “location, location, location.” The reality is that location is everything when it comes to choosing real estate. It’s important to look at the values of homes in the immediate vicinity of the subject property. The closer in proximity (and more similar, but more on that soon) a home is to the property in question, the better. The value of a home in one neighborhood can be tens of thousands of dollars higher or lower than the value of one in a neighborhood that’s just one mile away. In order to do a comparable sales analysis, an agent should focus on the closed sales for a particular neighborhood, complex, or building (if it is a Miami Beach condominium for example).
In addition to evaluating properties within a small radius, the comparable sales approach should focus on properties that are substantially similar to the subject property. For example, the comparable properties should resemble the subject property with respect to number of bedrooms, number of bathrooms, square footage, availability of outdoor space, and so forth. The more similar the properties are and the more characteristics they share, the stronger the derived value will be. At the same time, any differences must be taken into consideration to adjust the value upward or downward.
For example, if two properties are extremely similar, but one that was recently sold has an in ground pool, it is imperative to assess how much a pool adds (or in some cases detracts, believe it or not, because some amenities can cost a great deal to maintain) to the home’s value. Knowledgeable real estate agents with a good pulse on their local market know or can figure out what certain features or amenities are worth. Obviously, a real estate agent’s comparable sales analysis can paint a pretty realistic picture of a home’s potential value, but for homeowners wanting an extremely precise measure of the fair market value of their home, it may be necessary to pay a licensed appraiser to conduct a thorough analysis!