The Real Deal
'Comps' Help Determine The Price Of A Home
By Jason Tyler
It's no secret. Home values in Silicon Valley have been off the charts. In the current hot market, homes often sell for thousands more than the listing price. If someone pays $200,000 over the asking price is that home actually worth $200,000 more?
The real estate market is subject to the same basic principle that drives the rest of our economy: supply and demand. The peninsula has a limited amount of available space on which to build, and what was available at one time is now filled with either residential or commercial buildings. In short, supply is very limited. Demand, on the other hand, is definitely rising. More and more people arrive in this area every day.
Those of us who live here know why--great employment opportunities, incredible weather, and an area that offers something for everyone. So what do we know so far? We have too many people and not enough homes. Are those the only determining factors, though, in setting the value of a property?
A certified appraiser follows basic guidelines to determine the value of a home. Generally, the home (subject) to be appraised is compared with four to seven comparable (comps) homes within a set distance and time. The similarities and distances may vary by neighborhood (rural, urban or suburban). The time is generally held to homes sold within the past six months and pending sales.
For example, the subject is a three bedroom, two bath home with 2,500 square feet on a 9,000-square-foot lot, with an upgraded kitchen. One of five comps is also a three bedroom, two bath home with 2,500 square feet on a 9,000-square-foot lot, but the kitchen is in its original condition. The selling price of the comp was $675,000, and the value of the upgraded kitchen is determined to be $35,000. The appraiser would then adjust the price of the subject property to be $35,000 greater than the comp, or $710,000.
Now, lets take the example of the home discussed at the beginning of this article that sold for $200,000 over the asking price. Is this property suddenly more valuable? In an indirect way, yes! When an appraiser uses this house as a comp for another subject property in that neighborhood, the value of the new subject property is seen as higher. For example, if the selling price of the $675,000 comp in the previous paragraph had been $875,000, the value of the subject property would be closer to $900,000.
Setting a price is not done in a vacuum. The concept of "location, location, location" now includes the question, "so what did my neighbor get for his/her home?"
Jason Tyler is with Pacific Guarantee Mortgage. Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors. Send questions on any topic to: Ask Your Realtor, c/o SILVAR, Los Altos District, 345 San Antonio Road, Los Altos, CA, 94022; call 650.949.9115; or send email to ppompei@siliconvalley-realtors.org.
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