Jan. 2, 2016
You have de cided to sell your house and your first thought is: “How much is it worth?” You know what you paid for it and how much you owe on the loan. You remodeled a bathroom and finished the basement. You want to buy a new home across town and need $25,000 for the down payment and closing costs. You decide $195,000 sounds like a good price. That figure seems to pop up a lot lately when you check out other homes for sale.
Sound anything like your initial thoughts when you decided to sell your house? This kind of information will definitely affect your final decision to sell, and it should be considered before selling. But, does it affect the value of your house?
Let’s look at five mistakes home owner’s make when pricing their house.
You know what you paid for your house.
Whether you inherited the house outright or paid $300,000 for it does not affect the current value of the house. Owning a house you did not pay for does not mean it’s worthless. Paying $300,000 for your house last year or 10 years ago does not mean it’s worth $300,000 today, however it’s not worthless.
House prices fluctuate over time for many reasons. The general state of the economy affects house prices. The condition of the neighborhood where the house is located becomes more desirable or less over time. The overall condition of the home is a consideration. This is not a viable method for determining a price.
You know how much is owed on the loan.
You may have an extremely low balance remaining on the loan. On the other hand, you purchased the house in the last year. Nearly the whole loan payment has been for interest meaning you practically owe what you paid for it. Does that mean the payoff of the loan is the value of your house?
No, this method assumes your house will always depreciate in value rather than appreciating. You will always lose with this strategy. However, house values do fluctuate with the economy and can go down. Homes bought before a drop in the economy, or in a dropping situation, may be worth less than when you bought it. In that case, your home would be overpriced in that type of market and will not command the original price or more.
However, if the economy is picking up, the supply of homes for sale in your area are down, and there are more home buyers in the market than before, the value of your home can increase. Basing the value of your home on the remaining balance of the loan will cost you hard earned equity.
You remodeled your house.
You bought a home and decided to remodel a bathroom, or finish in the basement, or add a larger deck. Remodeling costs money. Surely, you can add at minimum what was spent for the remodel to the original cost of the home to get its latest value. Can’t you?
No, it’s not that simple. Most improvements will not recuperate the original expenditure. Moreover, it depends on what was done and the quality of the work. High quality kitchen remodels for example may very well make your home worth more than the cost of the remodel.
However, adding an addition that does not fit the architectural style of your home and does not flow with the current floorplan probably will only return a small portion of your investment.
Do not error on pricing your house by adding the remodel cost to the original price of the home to calculate the sales price. Chances are great that formula will over price your house for the market. However, you don’t want to lose money using that formula if your remodel does add real value to the price.
The amount of cash you need to buy your next home.
So you have decided to move. You have already picked out a new house and know how much money you need for a down payment and closing costs in order to buy it. Can you add the amount you need to have for the new home to how much you owe on your current home to determine your old home’s value?
No. This is a simple formula, but flawed. That’s like trying to make your home into a money press. Just decide how much you need, add it to the price, and walah…got what you need.
What you want for your house.
You decide to sell and you think $195,000 sounds reasonable. Based on what? This is similar to the above example.
Pricing a home requires investigation, research, and knowledge of the local market. Look at your county tax appraisal website to see what homes sold for in the last six months around your home. Ask several real estate agents to do a comparative market analysis and give you a price. Check out home selling websites as well. Then you can make an educated choice on a price.
Each of the above pricing formulas are simple and easy, which makes them appealing to use. Unfortunately, pricing your home incorrectly will have one of two results. 1) You underprice the house and lose hard earned money. 2) You overprice it and it never sells.
However, three of the five formulas discussed are pertinent factors for determining if you should sell. It does matter how much you paid for and owe on your home once you have determined its value. It will help you evaluate if the home is worth more or less than you owe on the loan. Then you can make an educated decision based on that information as to whether you want to sell the house or not.
Likewise, the balance of what you owe and what you will net from the sale may or may not be the amount you need to make the move to that new house you want.
I advise due diligence when pricing your house. Have several real estate agents do a comparative market analysis on your house and see what value they give. Get an appraisal from a licensed real estate appraiser. Look at the county tax appraiser’s website to see what similar homes have sold for as well. Then you can make an educated decision on what to price your house. Sorry, this is not a simple formula and requires some effort. However, you will have a competitive price for your home that will not cost you thousands in lost profit. It doesn’t cost being diligent pricing your house, it pays.
(Originally posted on ActiveRain)