How to determine the selling price for a house
House values vary widely from area to area, and even within an area, depending on many factors. There are three commonly used ways to determine the value of a home or other building, and each plays a part in property appraisal.
The
most widely-used and accepted in residential practice is the sales
comparison approach, or CMA (Comparative Market Analysis). The CMA approach bases its opinion of value on what
similar properties in the vicinity have sold for recently, with
appropriate adjustments for time, acreage, living area, amenities and
so on. It is these adjustments where the expertise of the professional
appraiser becomes necessary -- no computer can tell you how much or
little to mark up for a fireplace without knowing the neighborhood or
even talking to Realtors and recent buyers in the area about how
important that amenity is in that particular location.
Another
approach to assigning house values is the cost approach. How much would a property cost to
replace, that is, rebuild, minus "accrued depreciation," that is,
depreciation that has occurred since the property actually was built?
The cost approach includes concepts like "economic life" and "effective
age" that are mostly of use in determining the value of special use
properties, special purpose properties or properties where subsequent
structural improvements greatly impact value. This is rarely used for assigning value for the sale of a home. The CMA method is far more common, except in situations of flood damage, fire damage, etc.
The
third approach to assigning a house value is called the income approach. Some properties
generate income for their owners -- the most obvious examples being
rental properties such as apartment buildings, non owner-occupied
houses and duplexes and the like. The rental income an owner might
reasonably expect from a property is part of its value. For an
owner-occupied residential property, this may not be applicable, but it
can be important if the property is to be rented out or used otherwise
to generate income, such as a storage facility, cell tower rental and
office building.
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Setting the Price on Your Home
Along
with location and condition, the pricing of a house is a major
component of the reasons why a house will--or will not--sell quickly.
Although the pricing should not be dealt with lightly, some sellers
have a tendency to put too much emphasis on the price and not enough on
the condition, ending up with a house that is overpriced for its
current condition and the overall market. Even if you find an unaware
buyer that appears willing to pay the high price, when the buyer
applies for a mortgage, the chances are good that the lender's
appraisal will force the price back down to market value.
It's important to get it right the first time
Care and time should be taken when establishing the original listing price for several reasons:
1) If the house value is such as the asking price is too high, it won't sell. If it doesn't sell and sits on the market the listing quickly becomes stale.
2)
If you overprice the house with the intention of reducing the price
later just to "see what the market will bear", when the price of the
house is lowered, it signals to buyers that it was (and still may be)
overpriced.
3) If the house value is such as the asking price is too low the house is under priced and most likely will sell quickly--to the detriment of your net proceeds.
Some factors that affect the price of a home
1) Location:
You can't get away from this one. If your house is located in a
desirable area that is in demand, you will be able to get a higher
price than you can for the same house in a less desirable area.
2) Condition:
A house that has been better maintained and shows better will always
sell for more than one that has had deferred (neglected) maintenance
and needs work.
3) Desirable amenities: If a house has amenities that are currently popular in the marketplace, it will bring a higher price.
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