Smaller housing markets suffer from a lack of historical data when determining the price of homes. So, how is a home’s price ultimately determined? Read below to understand the process we use at New Again Houses when appraising a price.
About the Author: Matt Lavinder is the founder of New Again Houses, which develops several properties every month and sells many of them through its unique Bridge to Own Program.
The Challenge of Pricing Homes in a Smaller Market
Determining a home’s value is one of the most difficult and important parts of real estate . It’s especially difficult in smaller markets because there are so few comparable sales. We don’t have large neighborhoods of similar houses in our area. Instead, we have a melting pot of houses on nearly every street. Some have been taken care of and many have not. Zillow and tax assessors are unable to generate accurate estimates in smaller markets like ours. On its website, Zillow admits its margin of error in Dallas, TX is over 10%. If it’s that inaccurate in a metropolitan area like Dallas, what is the margin of error in a smaller market where there are far less sales to compare to?
So, how do we determine a sales price? Like licensed appraisers, we use comparables to determine a home’s value. We dig through recently sold homes that are most similar and use those sale prices to predict the value of our homes. During the mortgage process, the lender will order an appraisal from an independent, licensed appraiser. The appraiser will spend several hours on the appraisal. In most cases, the appraised value is higher than the sales price. In our most recent sale, the sales price was $80,000 and the appraisal came in at $95,000. When we underestimate the value of a house, the price doesn’t increase. But, in the rare occasions when an appraisal comes in lower than the sales price, we adjust the price down accordingly.
Like anything else, you usually get what you pay for in real estate. If a house is priced well under market value, there is probably a reason.