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It’s easy to fall in love with a home that you believe perfectly fits you and your needs, and then impulsively make an offer out of fear that another buyer will snap it up. With housing inventories continuing to shrink, many people feel they’re in a race against the clock to beat the competition. The statistics bear this out: A recent Redfin study identified a number of U.S. cities where, on average, homes are on the market for less than 10 days.
While there is no denying that the market is extremely competitive, you need to take the time to determine what a home is really worth. To figure that out, it’s critically important to evaluate the comparable sales — or comps, as we call them — which are recently sold homes that are similar to the one that you want to buy. Here’s how you can use them to your advantage:
• Consult a listing service: Have your agent pull comps from a multiple listing service (MLS). To get the most accurate assessment of the home’s value, you should focus on properties that have sold within a one-mile radius.
• Compare recent sales: You should look at nearby homes that have sold within the last six months. This is important because real estate market conditions change, and mortgage rates go up and down. If you look at home sales from two years ago, the sales numbers will likely be outdated.
• Get a home inspection: It will cost you between $300 and $750, and can reveal the true condition of the home to help you compare it more honestly. An inspector might determine that there are things that will have to be fixed or replaced soon after you move into the home — for example, leaking pipes that are causing a chronic water problem, or an old roof or furnace.
• Consider the property’s characteristics: You need to focus on homes that are similar to the one that you want to purchase. If you’re looking at a home with three bedrooms and two bathrooms, you should compare it with houses that have the same number of bedrooms and bathrooms. Or, for another example, you shouldn’t compare a detached single-family home with a duplex or townhouse.
• Compare size and age: The size of the property matters. You’re not just buying the home; you’re buying the land on which it sits. If you are comparing two very similar homes on the same street, the one with the larger lot size is going to be worth more. The age of a home matters. You have to factor that in if you’re comparing an older home that has seen better days with an identically sized newer home that has a lot of bells and whistles.
• Evaluate special features: Things like an updated kitchen with new appliances, luxury bathrooms, a remodeled family room and well-maintained hardwood floors increase a home’s value. Younger home buyers tend to favor homes with spacious rooms, open floor plans and modern features. They might have chosen to pass on an older house that hasn’t been updated because they don’t want to spend tens of thousands of dollars on improvements and upgrades.
• Only look at homes that have sold: You shouldn’t include homes that haven’t sold in your comparison. If a home has been languishing on the market for two years, it’s likely been overpriced. Sellers who are attached to their homes can often place inflated monetary values on them. As a result, they will ignore market forces and refuse to lower the asking price.
Buying a home is likely the largest investment that you will make in your lifetime. That’s why it is important to be thorough when determining the value of the property. Evaluating the comps will help you make a fair offer that the seller hopefully will accept.