How to assess a home's market value?
Last modified: 2021/05/28 | Approximate reading time 6 mins
For most people, investing in real estate is a source of anxiety and stress. Making the right decision on a major project, which in most cases requires a mortgage, represents a significant challenge.
The first thing to know is that your fears are well founded. No one can afford to make a mistake in the purchase of a home, especially when it comes to market value. In the best case scenario, the seller has recently obtained a property appraisal from a certified appraiser.
In such a case, you will be able to consult a detailed report that will demonstrate, with evidence, that the asking price is in line with the current market. However, not all sellers go to the trouble of investing in an appraiser who will cost them a minimum of $500. It will be up to you to determine if the price really corresponds to the property's value.
In this article, we will detail the points you can rely on to evaluate the house you are interested in, in order to pay the right price and above all "not to be fooled! "
5 tips for assessing the value of a home before making a promise to purchase
1. Evaluate the house by conducting a comparative market analysis
In real estate jargon, a comparative market analysis means estimating the price of a house by comparing it to other similar properties that have recently sold in the same area. You will need to start gathering the necessary information (year of construction, number of floors, lot size, etc.) during your first visit in order to make an accurate and detailed comparison.
Your real estate broker will probably be the best person to provide you with a list of comparable properties that have recently been sold in the area. For this purpose, we recommend that you select three to ten recent comparable properties in order to establish a price range that reflects reality. So, if the prices vary between $300,000 and $320,000 and the price of the house you are interested in falls within this range, then you can go ahead and make a promise to purchase.
Note that in order to make a fair assessment, you will have to make the necessary adjustments, because the houses you will compare may not necessarily be 100% similar to the one you are interested in. A garage, a pool, a finished basement, a deck or an extra patio are all elements that can vary the price by a few thousand dollars. A comparative market analysis can be quite a tedious job, which is why you should ask your broker for help
2. Ask for advice from your broker to perform the evaluation
Real Estate Brokers know the market in the area where they usually work, since they have already completed a few transactions and have a good idea of the prices and the factors affecting them. You can trust them in this regard! Moreover, real estate professionals are above all good allies to help you regain your senses in case you find THE house of your dreams, but the price is exaggerated or it has major drawbacks. They also are great weapons to negotiate the price or the selling conditions of a house.
3. Estimate the cost of renovation work
Does the house need a refresh? Or even undergo major renovations? Properly analyze the various elements that require work and ask the owner about them. Once you know more about this aspect, call a contractor to get an estimate of the renovation costs so that you can deduct this amount from the purchase price.
It's also normal for a homeowner who has renovated their kitchen or bathroom to charge a significant amount for their investment. Not only does a renovation make the house look better, it also ensures that you won't have to do any work for many years after the purchase. That's a lot of energy, time and money saved! Don't hesitate to ask the owner for the work costs (with invoices).
If, in your comparative analysis, you have found a similar house that was sold for $250,000, but the house you are interested in has a kitchen that was renovated for $20,000, you will have to make an adjustment. A renovated bathroom costs on average $12,000, while a roof renovation costs $4,000.
Other elements have been renovated and you would like to have a cost estimate? Consult this cost calculator for home renovation projects.
4. Reviewing energy bills
One of the documents you should ask to see during the visit is the energy bills. Indeed, this aspect can make you give up on a house if its energy consumption is too high. This can be a strong argument to negotiate the selling price if all the insulation has to be redone.
If, on the other hand, the walls, floors, doors and windows have recently been re-insulated and the energy consumption is really low, then this will have an impact on the price of the house at evaluation time. Moreover, this represents a long-term investment, as you will save energy in the years to come. A good point for your finances and for the environment!
5. List the positives and negatives
This includes proximity to schools, daycare centers, grocery stores, restaurants, medical services and green spaces, among others. Location is crucial in assessing the market value of a property. On the other hand, being too close to a highway, a railroad or a noisy street are all negative aspects that are food for thought.
Your evaluation should answer the following questions:
- Will it be possible to extend the house?
- Are there any municipal regulations prohibiting installation of a pool or shed?
- How much are the municipal taxes and condo fees (if applicable)?
- Is public transportation available? If so, which ones? (You will agree that a house located 5 minutes from a train station won't have the same value as one located 45 minutes away).
- What about the neighborhood? Are people respectful and do they look after their property? (This may have a major impact on market value growth or decline in the foreseeable future).
Should I rely on the municipal assessment?
Every three years, municipalities conduct a property assessment to determine the value of the buildings within their boundaries. The city's assessment department is able to establish the value of each property. Is this process carried out for the benefit of buyers? The answer is no, not at all. Municipalities collect this data only to determine the amount of municipal taxes for each property.
It would be a mistake to rely on the municipal assessment to determine the value of a home for many reasons. First, there is a one and a half year delay between the time the city determines the market value of the property and the time the new property roll comes into effect. In addition, in some areas, the real estate market is particularly dynamic and prices are constantly increasing.
The importance of properly valuing a home before making a promise to purchase
Getting a mortgage
The importance of a proper appraisal is paramount: no bank will agree to give you a mortgage if they think the price of the house is significantly higher than its actual value. And yes, before granting you a loan, your bank will first mandate a certified appraiser to assess the price of the house.
A good way to protect oneself is to protect one's clients from bad deals. Note that it is usually the buyer who pays the appraiser's fees, unless you have negotiated an agreement with the lender.
Keeping a clear head throughout the process
As mentioned earlier in the article, buying a house is already a source of stress, so if you add to this the doubt and fear of not making the right decision by accepting to pay a price you are not convinced of, there is a great chance that your real estate project wont run smoothly.
Keep in mind that if you make a promise to purchase at a given price and the seller accepts it, there is no turning back. You are obliged to go through with the process. If you find out later that the house is worth $40,000 less than what you offered, it's too late. That's $40,000 you could have invested elsewhere, in renovations, furnishing your new home, a new car, your children's education savings, etc.
Of course, for some properties, you should not wait too long before making a promise to purchase. However, it is essential to take the time to think it over and evaluate the property so you feel confident about your decision and have no regrets.
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