Trying to price a home accurately, effective home valuations make the home selling process faster and less stressful, and knowing the right value of a home can help you secure a better deal for your buying client.. Even if you’ve had experience in the real estate market, home prices can differ substantially from your initial evaluations.
Your approach can be made much easier if you boil down the factors to the critical ones that demonstrate having the most powerful effect on a home’s value. These are the most important factors you’ll need to consider when valuing a home:
5 factors that influence a home’s value
1. Neighborhood
The neighborhood is one of the biggest influencers of a home’s value, responsible for both qualitative and quantifiable aspects of a home’s appeal. For example, local school system quality and home prices tend to be strongly correlated. Crime rates, similarly, are negatively correlated with home values in the neighborhood.
One of the indicators is also the sale prices of similar homes in your neighborhood that have sold recently. These comparable homes are often referred to as “comps”. The desire to be closer to jobs, schools or public transportation is a primary reason for purchasing a home, according to a recent National Association of Realtors (NAR) report. Other factors that can make a neighborhood appealing enough that they improve a home's value include:
- Proximity to grocery stores, shopping and entertainment
- Access to public transportation and major highways
- Available parking
These factors may influence why buyers are willing to pay much higher prices on some homes than other homes that are just a few miles away. The neighborhood can also hurt a home's value if, for instance, it's close to an airport or a busy thoroughfare. A perfect home on paper may not be so perfect if the location doesn't fit with a buyer's lifestyle.
2. Location
Your current home may be the ideal location for you — close to your job or near your parent’s house — but not for everyone. When appraisers determine how much value to assign based on the location of the house, they’re looking at three primary indicators, according to Inman:
- The quality of local schools
- Employment opportunities
- Proximity to shopping, entertainment, and recreational centers
These factors can influence why some neighborhoods command steep prices, and others that are a few miles away don’t. In addition, a location’s proximity to highways, utility lines, and public transit can all impact a home’s overall value. When it comes to calculating a home’s value, location can be more important than even the size and condition of the house.
3. Size and appeal
When estimating your home’s market value, size is an important element to consider, since a bigger home can positively impact its valuation, with some prospective homebuyers looking specifically at price per square foot to filter out this effect and determine value.
Bigger houses tend to sell for higher prices, of course. You’ll also have to consider the appeal of the house; traditional, neutral layouts tend to carry more value than obscure layouts that appeal only to niche audiences. The more general the appeal of the home, the greater its value will be (especially considering resale value).
The value of a home is roughly estimated in price per square foot — the sales price divided by the square footage of the home. Say a 2,000 square foot house sold for $200,000. The price per square foot would be $100.
The price buyers will pay per square foot can vary greatly. Depending on where you’re buying, $100 per square foot may be a bargain or far more than it’s common to pay.
In addition to square footage, a home’s usable space matters when determining its value. Garages, attics, and unfinished basements are generally not counted in usable square footage. So if you have a 2,000-square-foot home with a 600-square-foot garage, that’s only 1,400-square-feet of livable space.
Livable space is what is most important to buyers and appraisers. Bedrooms and bathrooms are most highly valued, so the more beds and baths your home offers, the more your home is generally worth. However these trends are very locally specific. It goes without saying that a five-bedroom house will probably cost more than a two-bedroom condo in the same area. The size of the lot the home occupies comes into play as well. Depending on the buyer, a big backyard may be more valuable than an extra bedroom. Overall, the desire for a larger space is the second most popular reason for purchasing a new home, according to NAR data. Looking at home value per square foot can be a helpful way to make apt comparisons of differently sized properties.
4. Age and condition
In addition to size and appeal, you’ll need to think about the home’s age and condition. Newer homes will sell for more than older homes because they’ll typically require less maintenance.
However, an older home that’s been well-maintained may sell for just as much as a newer home — condition matters. Things like the home’s foundation, structural integrity, electrical work, plumbing and fixtures are all worth considering.
Typically, homes that are newer appraise at a higher value. The fact that critical parts of the house, like plumbing, electrical, the roof, and appliances are newer and therefore less likely to break down, can generate savings for a buyer. For example, if a roof has a 20-year warranty, that’s money an owner will save over the next two decades, compared to an older home that may need a roof replaced in just a few years. According to HomeAdvisor, the average cost to replace or install a roof in 2019 is just under $8,000.
Many buyers will pay top-dollar for a move-in-ready home. This is why most buyers require an inspection contingency in their contract — they want to negotiate repairs to avoid any major expenses following the sale.
Age could bring down a home's value, especially if the home needs work. Buying a fixer-uppercan translate to all kinds of additional costs. There are cosmetic concerns such as an outdated kitchen or a less-than-modern floor plan, and then there are functional issues like problems with the home's roof or plumbing.
Replacing a roof can run over $7,000, while an HVAC system could set a homeowner back more than $8,000, according to a 2019 remodeling report by NAR. Generally speaking, it also costs more to insure an older home. On average, homeowners insurance premiums are 75% higher for homes that are more than 30 years old.
5. The state of the local market
The current state of the housing market will also influence a home’s value. Home prices are shaped by supply and demand, like any other economic asset, and may fluctuate based on subtle changes in your area’s economy.
For example, if there’s a shortage of available houses and plenty of people looking to move to your area, home prices will rise. If the overall national economy is doing well, home prices will also increase.
Even if your home is in excellent condition, in the best location, with premium upgrades, the number of other properties for sale in your area and the number of buyers in the market can impact your home value. If there are a lot of buyers competing for fewer homes it’s a seller’s market. Conversely, a market with few buyers but many homes on the market is referred to as a buyer’s market.
Additionally, market conditions can affect how long it takes your home to sell. In a seller’s market, homes tend to sell quickly, whereas in a buyer’s market it’s typical for homes to see longer days on market (DOM). DOM is a real estate statistic that indicates how long homes are actively listed before a contract is signed. If your home has been on the market for a longer period of time, buyers may perceive there is something wrong or that the price is too high.
The housing market tends to run in cycles, alternating between favoring buyers and sellers. When supply is low, home prices tend to go up—especially if there's a surge of buyers. Mortgage rates are another important piece of the puzzle, and they vary based on economic conditions and other market factors.
How to Estimate the Market Value of a Home
To get a general idea of how much a home might be worth, you could use an online home value estimator, which considers recent sales and listing prices to predict a home's value. These tools are typically offered by popular real estate sites such as Zillow and Trulia. You can also try the Federal Housing Finance Agency's House Price Calculator, which uses a home's most recent selling price to project what it would be worth today if it appreciated at the average appreciation rate of other homes in the area.
For a more accurate estimate, work with an experienced real estate agent who understands your local market and can guide you in finding similar comps.
If a home is being financed, the lender will typically have an independent property appraiser inspect the property, taking note of its overall condition, size, number of rooms and so on in order to assign a value. Cash buyers, and those looking for a second opinion, sometimes also hire their own appraisers.
The Bottom Line
Every property is unique, and many different factors can influence a home's value. Whether you're looking to sell your home and buy a new one, or you're a first-time buyer, your credit score is critical. The more time you spend looking at, valuing and comparing homes in your specific area of expertise, the better you’ll get at making accurate projections of a home’s potential selling price. Get to know your neighborhoods — and the types of houses you find in them — inside and out.
SOURCES: https://www.inman.com/2017/08/07/6-factors-that-influence-a-homes-value/, https://www.opendoor.com/articles/factors-that-influence-home-value, https://www.experian.com/blogs/ask-experian/factors-that-affect-home-value/