How to make the right offer on your dream home

Do perform an analysis of recent comp sales

Do start with an analysis of the most relevant recent benchmark sales in your target market – this study set is variously known as the “comparable sales data”, or often simply as “the comps”. The more recent the sale, the more relevant the comp. The geographical boundary of a target market can vary quite a bit – it could be as small as a single neighborhood, or as large as a city. Often school district boundaries will play a substantial role in defining the target market. Your real estate agent can help you define the appropriate geographical area to consider.

Do consider all the property-specific factors that influence value

Geography is the first of many factors you should use to define your target market and resulting comp set accurately. Other relevant factors include price-point, property type, neighborhood and school quality, traffic patterns and commute times, as well as characteristics unique to each property, such as architectural interest, floor plan, construction quality, finish details, lot size and quality, landscape, and privacy. Other special considerations might include waterfront access, view quality, or community amenities such as a clubhouse or pool.

Once your target market has been clearly and carefully defined, you’ll be in a position to isolate and review only the most relevant recent benchmark sales. With your data set, you’ll be able to derive instructive metrics for your target market; for example, the average dollar-per-square-foot ($/sqft), average cumulative days on market (CDOM), and the average sale-price to list-price ratio (SP/LP).

Do consider differences in square footage types

Not all square footage is valued equivalently. To conduct an accurate comparison of home size, make sure you’re making an apples-to-apples comparison of square footage “types” within each of the comp sales you’re considering. Types of footage might include main-floor, upper-floor, basement, patio, garage, and various other semi- and unfinished footage. Your real estate agent can help explain the marginal differences in value from one square footage type to another, and help you apply the appropriate discounts to make sure you’re conducting a true apples-to-apples comparison within your comp set.

Do understand the nature and condition of your market

Take the time to learn about market absorption rates in your specific target market – this “pace of sales” data defines, axiomatically, the relationship between (housing) supply and (buyer) demand. When you know the current relationship between supply and demand, this will tell you whether or not prices levels in your target market are rising, falling, or stable. Your real estate agent can provide you with market absorption data for your target market.

Do consider macroeconomic trends that influence value

Larger economic trends always have the potential to change the current relationship between supply and demand in your target market.  For example, changes in mortgage interest rates and in the local employment picture are always major drivers of housing demand; new home-starts and improvements in local transportation infrastructure are two obvious examples of factors which drive housing supply.

Do hire a qualified real estate agent

A knowledgeable real estate agent will have access to a wealth of information about your target market, and can help you sort through the mountains of data to isolate the most relevant comp set, and can assist you in analyzing it. Together with a careful study of macroeconomic trends, a carefully scrutinized comp set gives you a strong foundation for determining the right price to offer on your dream house.

Do not include comps outside your target market

Don’t include potential comparables in your study group that are outside your specific target market – again, defining that target market in terms of geography, price-point, property-type, and other relevant factors in your area. If a potential comps lie outside your specific target market, it’s not going to be an instructive point of reference. When you take into account comps from outside your specific target market, this is known as an “aggregation error”, and yields distorted, ultimately meaningless, metrics for making calculations in your specific target market.

Do not listen too seriously to news reports

The purpose of news reporting is to keep things simple and reduce complex situations into sound bites. Because of this need to simplify, simplify, simplify, news reports about the real estate market are laden with enormous aggregation errors. There is no such thing as the real estate market, but rather innumerable sub-markets, each of which has its own unique drivers of supply and demand. Even within the same geographic location, it could be possible – for example – that entry-level condo prices are falling, while at the same time prices on mid-market single-family homes are flat, and prices on luxury homes are rising. There are many “markets within markets”, and it’s important to distinguish yours in the most precise terms possible. Accordingly, it’s vital to ignore media noise about the market and instead stay focused on the data and metrics within your specific target market.

Do not consider the tax-assessed value of the property

This is a meaningless point of reference. Tax assessors have their own unique methodologies and algorithms to determine property valuation for the purpose of taxation. The tax-assessed value of a property could be higher than the market value, or it could be lower than the market value. Either way, tax-assessed value is not market value.

Do not consider a seller’s bank appraisal

This is also a meaningless point of reference. It’s impossible to know the motivations and biases of any third party’s estimation of value, so this sort of information is notoriously unreliable. It’s also probably out-of-date. Bank-appraised value is not market value.

Do not pay too much attention to advice from non-experts

While you may welcome advice from family, friends, coworkers, and other non-experts who reside in your same target market, chances are that they don’t have access to the same up- to-the-minute market data that you can obtain from your real estate agent. It’s vital that you stay focused on your analysis of comp sales and market trends in your target market. Random anecdotes about experiences from other markets at others points in times are guaranteed to be unilluminating at best.

Do not become overly preoccupied with automated valuation models

Automated valuation models (AVMs) are house value estimates that you see on many real estate websites. The most obvious problem with these models is that they fail to take into proper account the actual physical condition of any specific property. In general, AVMs will assume any property to be in “average” condition, when in fact any specific property’s actual condition could be either much better or much worse than average. Additionally, because AVMs rely on transactional data which can take several months to be uploaded and assimilated, their valuation models therefore also lag the market by several months, thereby failing take into account current market conditions.