How Do I Find the True Market Value of a Home I’m Considering?

Reader question: “I’m looking at a house that I think might be overpriced. What’s the best way to know for sure? How do I find the true market value of a home I’m thinking about buying?”

Let’s start off with a quick definition to make sure we’re on the same page. In real estate terms, the “market value” is the most probable price a that particular home will sell for, based on local housing market conditions and recent sales activity.

Keep in mind that property valuation is not an exact science. If you had 10 licensed home appraisers tell you the current market value of the house you’re considering, you’d probably end up with 10 slightly different numbers.

You’ll notice that my definition of true market value does not mention the original price paid by the current owner. Unless they bought the home a month ago, the original purchase price is likely irrelevant to the current market. Likewise, the market value of a home has nothing to do with the homeowner’s current mortgage balance. Many sellers list their homes for the amount needed to pay off the loan. This is wishful thinking, and nothing more.

How to Determine Market Value of a Home

With that introduction out of the way, let’s get down to the nuts and bolts. How do you know the market value of a home you’re considering?

The first thing you need to do is track home sales in the area. The longer you do this, the better. It gives you a good base of knowledge with regard to asking prices versus selling prices (only the latter determines market value).

Next, you should look for sales data on homes that are similar to the one you’re considering. This is what real estate agents refer to as comparable sales, or comps. The more similar the two properties, the more accurate the pricing comparison. Try to find recent sales that closely match the type of property you are considering, and in the same area. A good comp is one that is (A) recent, (B) similar, and (C) geographically close to the target house.

Try to dig up as many home sales as possible. This will help you find the true market value of the home you’re considering. It will also support your offer amount, by showing the seller you’re using actual sales data to determine your offer amount. You should lean toward the most recent data. Prices change over time, so recent comps will give you a better idea of what’s happening now, in the current real estate market.

When estimating the market value of a house (and it is an estimate), you also need to take any unique features into account.

For example, let’s say I’ve found sales data for two colonial-style homes that are 2,000 square feet. The home I’m considering is also a colonial with 2,000 square feet. But it has a completely renovated kitchen, a pool, and sits on a more spacious corner lot with a great view. The other houses lack these qualities. So the house I’m considering will likely sell for more than the two comps, despite the fact that the homes are similar in size and style.

So you can’t just go by the house “specs” like size and number of rooms. You have to consider other value-adding features as well.

A Basic Formula for Shaping Your Offer

Here’s a good “formula” to keep in mind when considering the market value of a home in a particular area:

Comparable sales prices + value adding features = a good asking price

If a homeowner uses this kind of logic when setting the asking price, the home will probably sell at or near the price they are asking. If they go over this amount, based on greed or the need to pay off their mortgage, the house will probably be on the market for a longer period time. This is why it’s important to understand true market value before making an offer.

And remember, this is not an exact science. In slower real estate markets, where there is very little sales activity, it can be harder to determine the market value of a home. On the other hand, it’s typically easier to measure the value of a house in a hot market with a lot of sales activity. When you add in the complexities of renovations, upgrades and add-ons, it gets even hazier. This is why it’s helpful to have an experienced real estate agent on your side.