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Determining a Home’s Value

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The most common method for determining a home’s value is to conduct a Comparative Market Analysis (CMA). A CMA is a side-by-side comparison of homes for sale, homes that have recently sold and homes that were listed but did not sell in the same neighbourhood and price range as a subject property. When a home is sold, a willing seller and a willing buyer determine the value of that home with the sale price. That price then becomes a benchmark for other similar homes in that area. Any differences between the subject property and the comparables are accounted for by making any relevant adjustments.

Current Comparables

These are the homes that potential buyers will be viewing and will be in direct competition with the subject property. How the subject property compares to these homes will directly affect its value.

Expired Comparables

This category outlines properties that did not sell. While the precise reasons for a property expiring without selling will vary, this information provides valuable insight concerning the top of the market pricing for a particular type of property. If a property that is similar to the subject property did not sell, then this would be a good indicator of what price range the market will not accept in a similar market.

Sold Comparables

Homes that have recently sold are the primary way to assess a home’s value using a CMA. However, adjustments need to be made to account for any differences between the subject property and the sold properties.

Adjustments

Adjustments are made to comparable properties to correct for the differences in factors affecting a property’s value to bring the comparable property in line with the subject property. A good comparable should be physically similar to the subject property so that minimum adjustments are required. Adjustments are made in the following four areas:

  1. Time

A CMA is a here-and-now snapshot of the market, based on the most recent data available; but it can instantly be rendered obsolete by any new market activity. The market is constantly changing – new listings, pending sales, closed sales, price reductions, and expired listings. The most recent listings and sales are considered to be the most accurate for comparison purposes. Any changes in market prices that have occurred since the sale of older comparables need to be adjusted for.

  1. Location

Location adjustments relate to the general location of a property (for example, a particular locale or neighbourhood), and specific attributes (for example, adjacent to parkland or in a cul-de-sac). The closer a home is to jobs, parks, transportation, schools, and community services, the more desirable it is.

  1. Lot Size

Lot size adjustments are based on the going rate per front foot of a given area, with little regard to minor differences in depth.

  1. Physical Characteristics

Adjustments are made for differences in square footage, the number of bedrooms and bathrooms, upgrades, features, finishes, etc. These adjustments are made based on value, not cost. For example, a fireplace may cost $9,000 to build, but its adjustment value may only be $5,000.

Next Steps

A CMA is the first step in determining a home’s value but there are other factors that must be accounted for that cannot be captured in a CMA. Some of these factors are subjective and can be difficult to quantify:

  1. Supply and Demand

A sudden increase or decrease in supply or demand can render a CMA obsolete. Changes in loan approval criteria, interest rates, economic policy, stock market activity, unemployment rates, etc. are examples of economic changes that can quickly change the direction of the real estate market.

  1. Defects

Defects are problems with a property that may or may not be observable but that materially affect the value of a home. The impact on value is not directly attributable to the cost to repair the defect(s). The interest to buy a defective property will likely be low. When interest is low and risk is high, buyers will demand a financial buffer. For this reason, it is always recommended, if possible, to address any serious defects before listing a home for sale.

  1. Stigmas

Stigmas are unrelated to the physical condition of a property but unfavourably affect the value of a property due to an event that occurred on the property (e.g., a death other than by natural causes, criminal activity, haunting, etc.). Stigmas do not necessarily need to be disclosed to potential buyers but the information may be easily available to a buyer by talking to neighbours or by searching on the internet. Stigmas may make a property difficult to sell and therefore lower the property’s value.

Lack of Comparable Properties

Situations may arise where the use of a comparative market analysis would not be the best method for determining the value of a property. In the event that there are not enough similar properties available to use for comparison, there are other methods available for determining a home’s value, such as the Cost Approach or the Income Approach. Your real estate agent can discuss these methods with you if applicable.

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