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What does ‘value’ really mean in real estate?

Wednesday, August 09, 2017

As a busy Miami real estate agent, one of the biggest challenges I face is helping customers make sense of the different “values” in the residential marketplace.

For example, I recently received this email from a client who has bought and sold many properties: “I am really confused about the value thought process. It seems like sellers can ask whatever they want — but isn’t the actual value dependent on what the buyer is willing to pay?”

A good question, one I will attempt to explain here. It is important to have a clear sense of these values, regardless of which side of the table you sit: Sellers should understand the logic behind pricing their homes, and buyers should have a solid foundation for their offers.

THE BASICS

The essential concepts to understand are the following:

▪ The seller (usually in consultation with their agent) decides the Listing Price.

▪ The buyer (also with their agent) determines the Purchase Price — when their offer is accepted.

▪ The amount of a recent closed sales determines the Appraised Value…

▪ …which then becomes a Closed Sale Comparable, or “comp.”

What a property sells for basically boils down to what the comps (similar square footage, rooms and baths, lot size, and location) in the area have sold for, together with the buyer’s opinion of condition, layout, updates, and overall property curb appeal.

MITIGATING FACTORS

Seems simple, right? Not so fast: There are factors in the marketplace which can complicate matters considerably. For example, a buyer might feel influenced by active sales in a particular area, and base their offer accordingly… but those numbers are only indicators of future values and may increase or decrease for arbitrary reasons.

Also, let’s say you are a seller with a large home but one that lacks updating, has a bad layout, and/or unappealing finishes. Your home may very well appraise merely due to its size, but you should be prepared for it to sell under its appraised value.

The same logic holds true for a home that may not appraise based on comps, but has been renovated with the latest finishes, a new roof, and/or impact windows and doors. In this case, chances are someone will be willing to pay a premium for these upgrades and it will sell over its appraised value.

Again: “Closed sales” are used to determine appraised values, and the prices of listed homes merely indicate where prices are headed in a particular area.

VALUE-ABLE EXAMPLES

Here are two situations which help illustrate the points above.

My team recently sold a home in West Kendall for $15,000 above its appraised value. It had been on the market (as a FSBO, or “for sale by owner” listing) for about 60 days and had not received any serious or substantial offers. When we first met with the seller, we suggested a higher asking price because of the home’s many positive attributes: It had been totally remodeled, was situated on a nice lot (slightly larger than others in the area) with great curb appeal, an inviting pool and a brand-new roof. The seller was a bit nervous about this strategy, but we were confident that the right buyer would come along.

Sure enough, within 30 days we had an offer for more than the seller had originally expected — but we still had the appraisal hurdle to overcome. Of course, when the appraisal came in, it was at a number below the offer and the buyer became hesitant.

But this is where forethought and preparation come into play. We immediately showed the buyer the pros and cons of similar sold properties in the area, and then compared those to the listed home, clearly demonstrating to them the costs required to update a different home to this one’s condition. Once we confirmed the true value inherent in their offer, it was a done deal.

Another example shows the opposite side of the value equation:

With a different listing, in South Miami, the seller ordered an appraisal and was adamant about listing the home not a penny below that number. As we say in real estate, the home had “good bones” but desperately needed to be updated. It also had a 15-year-old roof and sat adjacent to a very busy street. Mitigating factors like these were not taken into consideration by our customer, and needless to say, the home proved challenging to sell.

Whether you are a buyer or a seller, success in real estate takes knowledge of the market, strategic analyses of properties, and a clear understanding of the different aforementioned “values.” (Achieving this success may appear easy with so much technology at your disposal, but don’t take that illusion at face value. Hire an agent to help you!)

By: BY MORY MACHADO @ Miami Herald

 
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