HOW CLEVER CLIENTS DETERMINE THE EXACT VALUE OF A PROPERTY SO AS TO GET THE BEST DEAL


Let's clear this up once and for all. There is only ONE way to determine the market value for single-family houses: Comparable Sales. Let me repeat: The most accurate way to determine the market value of a house is to use actual comparable sales.

Comparable sales are recent sales of similar houses in the same or similar, nearby neighborhood. This approach is called the "market comparison" method and is the method used by professional, licensed real estate appraisers for appraising single-family houses.


Assessed value

IGNORE, I repeat, IGNORE the "assessed value" of the house. Tax assessments vary dramatically from one area to another. Each Tax Assessor's Office has its own individual approach to assessing the property within its jurisdiction.

The information is rarely current. This approach may or may not have any bearing on the real market value of the property. Never rely on assessment and tax information to determine current market value unless you are an expert on tax assessments for your area.
Last sale price
Like tax assessments, it is also dangerous to rely on the "Last Sale Price" of the house. The previous buyer of the house may have paid too much or too little for it. You have no way of knowing. Moreover, the Last Sale Price is an event that occurred much too far in the past to be relevant to the current market value. It is safest to ignore this information as well.
Real estate agents and "listed" price
You should always do your own market value analysis. Never rely on the agent's opinion regarding market value. Your own opinion will be much more accurate once you have learned the correct way to determine market value. Although real estate agents learn to calculate market value, they also learn to unduly complicate matters. Some of this can be dangerous to your pocketbook.

For instance, in determining market value, many agents consider the "listed" or asking price of houses that have not yet sold. This is foolhardy at best. The only measure of market value is what a house sells for. Period.
Using comparable sales to calculate value
The most accurate way to determine the market value of a house is to use actual comparable sales. In theory, if three identical houses in the same neighborhood have recently sold for $80,000, $78,000 and $81,000, a forth identical house will sell within this same price range.

The market value of the fourth house, therefore, is between $78,000 and $81,000. The problem, however, is that in real life this happens rarely.

More likely, you will find that different houses in an area have sold for a wider variety of prices, perhaps within a range of $59,000 to $100,000. Some houses are larger, others smaller. Some are older, others newer. Some need repairs, others are perfect.
The asking price may be inflated for several reasons. First, some sellers just want to test the market to see what they could get for the house if they really wanted to sell it. They may not even intend to sell the house. Second, some sellers are unrealistic. They are in love with their house and won't sell it unless they can get what may be a wholly unreasonable price.

The listed price also may be inflated because of the real estate agent who obtained the listing. Real estate agents compete vigorously with each other to get these listings. The agent who has the listing earns a commission when the house sells, even if some other agent actually sells the house.

The agents who make the most money are usually the ones who can get the most listings. Therefore, some agents are tempted to "stretch the truth" when they tell the home owners the market value of their home. They want to convince the sellers that their house will sell for more if they will list their house for sale with the agent's company.

Once the agent gets the listing and the house doesn't sell for this inflated price, the agent will persuade the sellers to lower the price. The price might be lowered several times before it actually sells.

The price of a house listed for sale with an agent may also be inflated because a real estate commission must be paid. Commissions vary from state to state and are usually between 5%  to 10% of the sales price.
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The big three...
While many factors come into play when you're evaluating a residential property's value by "comps" (comparable sales), the three key factors are location, size (square footage) of the home, and the number of bedrooms and bathrooms.

Obviously, you'll need to look at many other aspects before you can pinpoint the exact value of a property, but these are the "big three." You should be able to look at comparable sales involving properties with these three factors and get a good idea of the value of the property you're selling.
1. Location
Location is extremely important when you're comparing sold properties. A professional appraiser typically looks at houses within a one-mile radius or less, and so should you. In the case of a subdivision, where the houses are all similar and built in the same time period, you need to compare similar houses with similar styles in the same subdivision to get an accurate valuation.

If there's a wide mix of properties in the subdivision, you may need to go outside of it to get comparable sales. Just be careful with "dividing lines." Geographic lines such as opposite sides of the river, the park, or a main highway can be invisible dividing lines that put the property in another school district and may not garner equitable comps.
2. Size
When determining a home's value, be sure to evaluate the square footage. Note that appraisers typically look at homes that are within 20% up or down in square footage as comparables. Generally (especially within a subdivision), most homes fall within a fairly limited size range. Therefore, you should be able to develop a good gauge for the selling price of homes in those particular sizes.

Of course, not all square footage is created equal. Most people think that if a house has 1,000 square feet and is worth $100,000, then the 1,100 square-foot house next door would be worth $110,000. Wrong! The extra 10% in square footage equals only a few percentage points in value. If these two houses offer the same location, style, and number of bedrooms and baths, the 10% additional square footage won't change the valuation much.

Why? Because there is a fixed cost on a house based on the value of the land, cost of construction, sewer, subdivision plans, and other factors. An extra few hundred feet of space involves very little cost--only wood, nails, carpet, and possibly some minor electrical and plumbing costs.
3. Bedrooms & bathrooms
The number of bathrooms and bedrooms is more relevant than simply the raw square footage. In other words, a three-bedroom home with 1,200 square feet might be worth more than a two-bedroom home with 1,250 square feet. It also matters where the bedrooms and bathrooms are located--on the main floor or the basement.

While finished basements can add value, the amount of that value is less than it is for above-ground living areas. Plus, this greatly varies depending on different regions of the country. In humid areas, below-ground living space isn't as valuable to homeowners as in dryer areas of the country.

To determine a home's value using comps, also look at the quality and number of bedrooms and bathrooms. Three-bedroom homes are generally a big plus over two-bedroom homes, but four or five-bedroom homes don't add as much over a three-bedroom if they are roughly the same size in square footage. Likewise, two bathrooms is a big plus over one bathroom, but three or more don't add as much value.

When comparing bathrooms, make sure you understand the different types of bathrooms and compare them correctly. A full bathroom includes a shower, bath, toilet, and sink. A three-quarter bath has a shower but no tub, plus a toilet and sink. A half bath has a toilet and sink but no tub or shower.

A three-quarter or full-bath create roughly the same value, particularly if another bathroom in the house has a tub. A half-bath has less value unless there are enough other bathrooms in the house. Also, a five-piece bath (separate shower and tub) generally wouldn't add more value than a regular full bathroom with a combination shower and tub.

There are other factors to consider that affect the value of a home, but generally you'd give these less weight than the location, size, and number of bedrooms and bathrooms. Some houses have one-car or two-car garages, some have carports, and others have neither. The garage factors in some value, depending on the rest of the neighborhood.

For example, if the neighborhood comps all have two-car garages, this can affect value as much as 10% on the subject property if it only has a one-car garage or no garage. However, if the houses are all small and there's a mix of garage options, the garage won't be as big of an issue. Likewise, a four-car garage in a three-car-garage-neighborhood probably won't count for much either.

One exception is with condominium developments. Parking spots or garages are generally sold with condominiums and can have substantial value, particularly in large cities where parking is limited to the street.

In addition to looking at properties sold in your target area, you need to look at properties that are for sale. While asking prices are not sold prices, it will give you an idea where your local market is heading--up or down. Also, keep in mind that if your strategy is to flip the property, the properties for sale are your direct competition and thus the asking prices are very relevant.

For example, if you find properties that have sold for $150,000, but the current inventory on the market is prices at $140,000, the asking prices of your competition become just as relevant, if not more, as the sold prices of other homes.

If you regularly invest in the same neighborhood, take some time to build yourself a "due diligence" notebook of properties that have sold, are under contract, and are for sale within your area.




How a REALTOR® Can Help
A real estate agent can  help you understand everything you need to know about the buying process. The process of buying a home or investment generally starts with determining your buying power; that is, your financial reserves plus your borrowing capacity. If you give a real estate agent some basic information about your available savings, income and current debt, he or she can refer you to lenders best qualified to help you. Most lenders -- banks and mortgage companies -- offer limited choices.

Looking
Once you know how much you can and want to invest, the next step is to find the properties that most nearly fit your needs. This is the time to choose a real estate licensee.

Choosing a property
Your job is to make the final selection of the right property for you. This is when excitement and emotion run high. Your real estate agent can assist you in the selection process by providing objective information about each property. Agents who are REALTORS® have access to a variety of informational resources. REALTORS® can provide local community information on utilities, zoning, schools, etc. There are two things you'll want to know. First, will the property provide the environment I want for a home or investment? Second, will the property have resale value when I am ready to sell?

Negotiating
There are myriad negotiating factors, including but not limited to price, financing, terms, date of possession and often the inclusion or exclusion of repairs and furnishings or equipment. The purchase agreement should provide a period of time for you to complete appropriate inspections and investigations of the property before you are bound to complete the purchase. Your agent can advise you as to which investigations and inspections are recommended or required.

Due diligence
With a negotiated agreement in hand, it is time to complete the evaluation of the property. Depending on the area and property, this could include inspections for termites, dry rot, asbestos, faulty structure, roof condition, septic tank and well tests, just to name a few. Your agent can assist you in finding qualified responsible professionals to do most of these investigations and provide you with written reports. You will also want to see a preliminary report on the title of the property. Title indicates ownership of property. The title to most properties will have some limitations; for example, easements (access rights) for utilities. Your agent, title company or attorney can help you resolve issues that might cause problems at a later date.

Financing
As soon as you are reasonably sure the property is right for you, the process of obtaining financing begins. Your agent can help you in understanding different financing options and  in identifying qualified lenders.
Closing or settlement
Finally, there is the closing, or settlement, as it is known in different parts of the country. Every area has its own unique customs. In some areas, the title or escrow company will handle this process. In other parts of the country, an attorney does it all. Again, your real estate agent can guide you through this process and make sure everything flows together smoothly.


The Bottom Line on Contract Negotiation
Ask these questions before you decide to go ahead with a contract.
The natural focal point of a real estate purchase contract is the selling price of the home, but the price isn't the only factor that determines the net bottom line for both the buyer and the seller. Is a bargain for the buyer really a bargain if he or she is paying all the transaction costs? Is a top price for the seller really a top price if the buyer wants all the furniture to be included in the purchase price? Or if the buyer they can't come up with the downpayment or qualify for a mortgage?
Before you decide to go ahead with a great price, here are five other bottom-line points to consider:
1. What are the estimated transaction costs and who will pay for what? Typical costs include the brokers' commission, a home inspection, a termite inspection, escrow or attorney's fees, a title search, an owner's title insurance policy, transfer taxes and recording fees. The price tags on these items vary greatly around the country. Who pays for what is a matter of both local custom and negotiation.

2. How much money is the buyer putting into escrow and how soon? A big deposit -- called "earnest money" -- and a substantial down payment are generally seen as a sign that the buyer is serious about completing the transaction. From the seller's point of view, the more money the buyer places in escrow and the sooner the money is transferred, the better.

3. Is there a mortgage financing contingency and how specific is it? The mortgage escape clause is a must for buyers, unless they're paying all cash for the home. Without this contingency, buyers can be legally obligated to purchase the home even if they can't obtain financing. Further, an open-ended statement that says the buyer will obtain a loan "at the prevailing rate of interest" leaves the buyer completely exposed to interest rate fluctuations. A statement that says the loan must be at an interest rate "not to exceed xx percent" and on specified terms is preferable.

4. What furniture, fixtures and appliances, if any, are being sold with the property? Technically, anything that's permanently affixed to or installed in the home is real property. Everything else is the seller's personal property. This distinction is a narrow one and it naturally leads to a fair amount of confusion. Are built-in appliances real property or personal property? What about a shelving system? A chandelier? Window coverings? Potted plants in the backyard? Sellers who intend to remove anything that's attached to the home should have that spelled out in the contract. And the same goes for buyers who expect to acquire any of the furniture or other movables.

5. What will happen if either side breaches the contract? Unless an unmet contingency triggers the abandonment of the contract, it's a binding legal document. Buyers who fail to perform can lose their deposit money. Sellers who try to back out can be sued for "specific performance," which forces the sale of the home to the buyer. Many contracts also specify that disputes must be brought in small-claims court or presented for arbitration or mediation.
Tip: Ask your real estate agent to go over the standard contract with you before you receive or make a purchase offer. That way, you'll know what to expect and be prepared to negotiate the best deal you can get.




Wait! Are You Buying the Right House?
Don't let your emotions overrule a reasonable assessment of whether a particular home really meets your needs.

Anyone who has ever bought a home remembers the wonderful feeling of finding the right property and falling in love with it. It's an indescribable mixture of comfort, excitement and dreams about to come true. "Can we afford it? Will the sellers accept our offer? How soon can we pick up the keys?" the excited buyers ask. Great vibes are undoubtedly a good sign in deciding to purchase a home. But you shouldn't let your emotions overrule a reasonable assessment of whether a particular home really meets your needs.
Here are a few of the many rational questions you'll want to ask yourself before you rush into a commitment to buy.
Price
Your lender says you can afford to buy the home you adore, but are you comfortable with the monthly payments you'll be obligated to make? Is the down payment within your means? Will you have enough cash to pay transaction costs and moving expenses? If the house needs major repairs, remodeling or redecorating can you save the necessary funds within a reasonable time period?

Condition
Along with price, the condition of the home should be a top consideration. Does the home need a new roof? Extensive upgrading of the electrical wiring? New plumbing? Is the home disaster-ready (e.g., bolted to the foundation in earthquake country)? A fixer-upper home with lots of potential can be a great find or a money pit. Will you be able to meet the financial challenges and live with the mess and inconvenience while the home is being brought up to your expectations?
Size and configuration

Is the house the right size for your needs and does it have the right combination of bedrooms, bathrooms and other living areas? Is that small closetless den really big enough for your child's bedroom? Is one bathroom adequate and if not, what are the real costs and headaches of adding a second one? Does the kitchen have enough cupboard and countertop space? Is the garage wide enough and deep enough for your vehicles? Will your piano really fit in that alcove near the staircase?

Comfort
Does the house have a central heating system? A central air-conditioning system? Are those climate controls important to you? Are the windows large enough and positioned to create cross ventilation? If the house has two stories, are you comfortable with the idea of walking up and down stairs every day? Is there a downstairs bathroom (and bedroom, if needed) for guests who can't navigate the stairs?

Style
Is the design and architecture of the house too modern or too traditional for your preferences in furniture and home furnishings?

Resale potential
People move to a new home every seven years, on average. If you wanted to sell your home or were forced by unexpected circumstances to sell it, how easy would it be to find a ready, willing and able buyer?

Features
Some buyers fall in love with pricey home amenities that seem attractive and desirable at the time, but later prove to be more headache and less pleasure than the buyers anticipated. Do you really want a swimming pool? High-maintenance ornamental trees? Commercial-grade built-in kitchen appliances? Expensive hardwood floors? Some homes are easier to visit than they are to own.

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