home_worth

Seller Psychology vs. Market Reality

Quick!  Which of the following are relevant for determining a home’s current value?

A. What the owner/seller paid for it.
B. What their neighbor sold their home for a year ago.
C. What the other neighbor currently is listing their home for.
D. How much money the owner spent on improvements.

Answer:  none of the above.

Sorry, trick question.

Here’s the explanation:

A.  Historical Cost. 

How much the owner paid for the home is very relevant — to them.

fivehomesPsychologically, many owners want to at least break even.

And financially, it’s often crucial that the home sell for enough to cover the mortgage plus commission and closing costs — if only because otherwise the Seller will have to bring money to closing (instead of collecting a check).

But, Buyers don’t care about historical cost, except for clues about the Seller’s bottom line, and whether the home is a possible short sale (supposed to be disclosed, but sometimes isn’t).

B. What the Neighbor Got For Their Home Last Year

At least by my count, in the last year the Twin Cities housing market has changed three times (if not four).

First, prices softened going into Fall, 2013 (Market #1).

Then, they really softened over the holidays — which is seasonally typical (Market #2).

Soon after the first of the year, activity kicked in quicker than usual — without any noticeable uptick in listings.

That triggered a slew of multiple offers (and brisk price increases) that continued through this Spring.

Call that Market #3.

3homesMost recently, inventory has been rising (a bit), cooling things off (Market #4).

Mindful of the above, lenders — who call the shots unless it’s a cash deal — typically insist on going back no more than six months to find Comp’s” (“Comparable Sold Properties”).

Don’t get me wrong:  it’s important whether prevailing prices on the block are $250k or $1.25 million.

And what the neighbor’s house sold for last year is indicative of that.

But, that’s all.

See also, “Why the Neighbor’s House Usually Isn’t a Comp.

C. What the Home Down the Street is Currently Listed For

Once it sells, your neighbor’s home could be a Comp for yours.

six homesThat would be true if it was a 4 BR/3 Bath Colonial with 3,200 FSF built in 1935, and yours is a 1945 Colonial with 4 Bedrooms/4 Baths built in 1947.

But if instead yours is a 1965 Rambler with 2,700 finished square feet — unh-unh.

To be a valid Comp, the property must be the same style, size, and condition as what is called “the subject home” — AND have sold in the same market conditions.

In the mean time, “asking price” is just that:  asking price.

D. Cost of Improvements

This is really just a mini-version of “A.” (“Historical Cost”).

Buyers obviously care whether a home has a state-of-the-art Kitchen or an original, 1950’s one.

four homesAnd a Kitchen that cost $150k presumably has nicer finishes, construction quality, and appliances than one that cost a fraction of that.

But, whether the owner spent $150k on it or $50k matters much less than prevailing home prices, as established by three, good Comp’s.

Once the agents (or the appraiser) have identified the Comp’s, the new or dated Kitchen is just another adjustment — that is, something you add to or subtract from the Comp’s to estimate the value of the subject home.

Got all that??

P.S.:  One of my favorite “nice try” marketing ploys was the listing agent who touted that the home “had a new Kitchen put in in 1990.”

Unfortunately, the home was on the market last year — making the “new” Kitchen over 20 years old.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.
1 Response
  1. Ross, you’re exactly right about the four factors, especially with respect to D (How much money the owner spent on improvements). One of the first things I learned as an appraiser is “Cost does not necessarily equal value.”

    I would add that there may be valid reasons to analyze active or pending listings (C). For example:
    1. In a rapidly appreciating/depreciating market AND if the best comps are more than 3 months old,
    2. To identify the upper limits of a home’s value

    Both of these scenarios are useful when theres a lack of sales data, which usually in the case in urban markets. That said, I would never use active or pending listings as my main support for my value.

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