"Location, location, location" isn’t just a meaningless mantra for buyers and sellers of homes. Your location helps determine how much your home is worth. Identical homes in different markets will sell for different amounts. Real estate is one market in which the “going rate” fluctuates constantly. Your home is only worth as much as someone is willing to pay for it, and the sales prices of homes around you help determine this rate. A big sale in your neighborhood could boost your home’s value, though you’ll need to keep a few things in mind when making comparisons.
Use of Comparables
Real estate agents set the sales price of a home using what are known as "comparables." Comparables for your home are the prices of other homes around you that recently sold, so the foreclosure down the street and the new luxury home up the block may both go into the comparables mix. A big sale can up the comparables average, while a low price on another home can send it soaring again. All homes aren’t created equal, so appraisers use complicated formulas to “even out” the comparisons. They’ll deduct percentage points for a home with fewer bedrooms or other less desirable features, and add percentages if a house has a hot tub or more bedrooms or other desirable feature. These deductions and additions allow reasonable comparison of the sales prices of different homes.
Making Your Own Comparison
While you don’t have access to a real estate agent’s formulas for comparables, you can estimate the effect that a big sale will have on the value of your home by looking at the details of the home that sold and the ways in which it is like your home, as well as the ways in which it differs. The more the home is like yours, the more likely its sale price will impact the value of your home. Some details to consider include the age of the home, square footage, the number of bedrooms and bathrooms, whether there’s a garage and the size of the garage, lot size, condition of the home, and location. If the home that sold for a high price is newer, larger, fancier, and in a better location than yours, its sale may have a much smaller effect on your sales price than if the house is roughly the same size, age and condition of yours.
It's important to compare the actual sales price of the home, and not merely what was on the real estate listing for the home. Sometimes people list a home for a very high price and end up accepting an offer for much less. You should also look at prices of other similar homes in the area that sold recently. A single home that sold for a high price could be viewed as an outlier if half a dozen other homes recently sold for much less. Maybe that one buyer overpaid for the home. One reason real estate appraisers study comparables is to look for patterns in the market. One big sale isn’t enough to establish a pattern.
Big Sale Effect
One way to gauge the impact of a big sale on your home’s value is to look at how others view that sale. If your local taxing authority increases your valuation for property taxes, that could be one sign that appraisers now consider your home worth more. If you notice other homes selling for higher prices, this could be an indication of a general upswing in the real estate market in your area. You can view online estimators such as Zillow.com to see if their estimates of your home’s value have increased following that big sale, and you can ask real estate agents, who have a finger on the pulse of the local market, what they think that sale means in terms of the value of your home.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.