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 another 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.
Psychologically, 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
Twelve months is a long time in the housing market.
Inventory can tighten or grow; interest rates fluctuate; stock portfolios (and 401k’s) expand and contract; and the economy pick up steam or decelerate.
Oh! And who is President (or likely to become President), and what policies they’re likely to pursue (limiting state and local tax deductions, anyone??) can affect housing supply and demand and — crucially — consumer confidence.
Mindful of all those variables, 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.
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.
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 1998.”
Unfortunately, the home was on the market last Spring ” making the “new” Kitchen over 20(!) years old.