When you’re moving from a higher-priced area to a lower-priced locale, it becomes difficult to objectively judge home values. It’s human nature to judge values and prices based on what you know. Unfortunately, if what you know is significantly higher-priced than the area where you’re moving, you run the danger of overpaying. Everything looks like a great deal, and you may jump too quickly at a deal that isn’t as good as it seems. Recalibrate your sights based on the area where you’re looking; don’t bring your old property value guidelines along for the ride.  

Forget Your Old Neighborhood Property Values

The first thing you ned to do when you’re moving from a high priced area to a low priced area is to forget your old neighborhood’s property values. If you’re moving from a place like Boston or San Francisco where a 1-bedroom condo may be valued at $350,000, or more, a 4-bedroom home for $199,000 may seem like a killer deal. In reality, though, that killer deal might not be such a great deal for the new neighborhood; it only seems great in comparison to the prices you’re accustomed to paying. Forget your old home values when you move to a cheaper area and start from scratch.

Research the Market to Determine Home Values

When you move to a new area, the first thing you should do is research market values. You need to judge home values based on the market; not based on what you’re accustomed to paying. A $199,000 home can seem like a great deal, but you may find that in the new market, the home is really only worth $175,000. Working with a savvy real estate agent can help, but you should also examine market analyses, look at a wide sampling of home values and check comps to get a good sense for what prices should be in your new market.

Going into a home-buying experience, you’ve got certain expectations about price and real estate values. If you’ve done your homework before you begin shopping, you’ll have a good idea about home values in a a given area and will know if they’re in line with your needs. This will enable you to more accurately focus on a specific neighborhood that’s likely to have home values within your price range, and exclude neighborhoods where values are too high for you. However, when you’re targeting areas based on prices, be careful not to exclude a bargain in a high-priced area.

Price is Relative

Price is relative. Home values and prices vary depending on the locale, the other home values around it and the specifics of the property. You might look at two identical homes in two different neighborhoods, and see two very different prices. The price of the same home in a more expensive neighborhood might be higher, even though the homes themselves have the same features, square footage and amenities. Don’t assume that the cheaper home in the less-expensive neighborhood is automatically the best deal, though – in some cases, the high-priced home might be the better option.

A High-Priced Home Might Be a Great Deal

Home prices in the neighborhood where you’re buying make a huge difference in the value of the home. Consider a case where a cheaper home in a less-expensive neighborhood is $150,000, and the property values in the neighborhood are all around $150,000. In this case, the home is priced comparably for the neighborhood.

Now consider the same home in a neighborhood where property values are more expensive. The sellers are selling for $175,000, but the average property values are around $200,000 in this neighborhood. If the property itself is comparable to other homes in the neighborhood that are valued at $200,000, the $175,000 price represents a value of $25,000 in instant equity. Even though the $175,000 price is higher than the $150,000 price for a similar home in a cheaper neighborhood, the $175,000 home is a better value because it’s actually worth more.

Many home features and amenities add value to a home, but it can be difficult to determine how much value a particular feature adds. When you’re looking at a home with a pool, for example, how much extra value does the pool add versus a home that doesn’t have one? How about a larger kitchen, or wall-to-wall carpeting? Sometimes you find a feature or amenity that you love and you may end up paying more than it’s worth. Make sure you determine the value of a home feature before you pay too much for it.  

Calculate Value Minus Depreciation

The most basic way to calculate the value of a feature is to calculate how much the feature costs and adjust for inflation. For example, if a pool cost $12,000 to install 10 years ago, it should add no more than $5,000 to the home’s value today with a 50% adjustment for depreciation.

How Easy is it to Add the Feature?

Features that anyone could add to the property, such as wall-to-wall carpeting or a new hot tub, don’t add as much value to the home as features that are difficult to install. Evaluate how difficult it would be to add the feature yourself to determine the value of the feature.

Beware of Features Too Expensive for a Home

Sometimes homeowners add features or amenities that are too expensive for a home’s overall value. For example, if homeowners spend $25,000 on custom cabinets, Sub Zero appliances and a top-of-the-line kitchen makeover on a home that’s only worth $80,000, the upgrade is worth too much for the property. You’d never get someone to buy the home at a price high enough to justify the expensive upgrades. Make sure the features and amenities that you love about a home aren’t priced too high relative to the property itself to justify them.

Comparable home sales form one of the biggest factors in determining a home price. If comparable homes sell for a similar price, you know you’re getting a good deal. If comparable homes sell for more or less, it might be a key to negotiate further or evaluate why a home is selling below market. However, what appears to be a comparable home at first glance might not actually be fully comparable. Make sure you know a comparable home is actually comparable before you use it as the basis for your purchase price.  

Don’t Overlook the Details

In theory, comparable homes are supposed to be in the same neighborhood and have similar characteristics to the home you’re buying. If a home isn’t in the same neighborhood, the comparable home may have important differences that affect price. School district, noise levels, nearby property values and location all affect how much a given home in a neighborhood is worth. Two similar homes in two different neighborhoods can have a drastic price difference.

You’ll also need to consider other small details of the property. Do they have the same lot size? Is there anything affecting the value of the lot, such as flooding, zoning limits or easements? Are the homes roughly the same in square footage and rooms? Make sure all of the little details add up, or you might not be looking at a comparable property.

Bracket Home Values to Determine the Range of Comparable Properties

One good way to determine whether comparable homes are actually comparable is to bracket home values around the property you’re considering. Find two or three properties that are clearly inferior to the property you’re considering, and two or three properties that are clearly superior. What are their home values?

Finding out the values of homes that are inferior and superior give you a bracket of minimum and maximum value for the property you’re considering. Beware of comparable homes that are too close to either extreme, as they’re not representative of the home’s real value.

Thinking that $200,000 home is a great deal because it’s better than the home that sold for $198,000 a month ago? Think again. Comparable home sales only tell a part of the story. That home that sold for $198,000 may have had $18,000 in seller’s concessions, making the real value of the property around $180,000. At that price, the $200,000 home doesn’t seem like such a great deal. Don’t be misled into paying too much for a home based on comparable sales data.

Learn the Whole Story on Price

Sellers who are motivated to sell are more likely to make concessions that aren’t necessarily reflected in price. To sell a $198,000 home, the sellers in one situation paid the closing costs, contributed $4,000 for an interest-rate buy down, and escrowed money for roof repairs. The total value of these concessions was nearly $18,000. That made the real value of the $198,000 home closer to $180,000.

When you’re looking at comparable home prices, ask yourself what you don’t know about the story. Were there seller’s concessions or other circumstances that led to the home’s value being different than the home’s price?

Is there a Change in Market Inventory?

Comparable home sales are only good for a finite period. Depending on what a real estate market is doing, comparable sales could be accurate for 8 months or 2 months. Ask some questions when you’re considering comparable properties. Is there a change in market inventory? Are homes staying on the market longer, or are there more homes on the market? Changes in market inventory may signal that price is moving up or down, and that comparable home values from a few months ago may no longer be accurate. Make sure you know what the market is doing when you’re considering comp values.

When you’re buying a home, you might be tempted to rely on information from your real estate agent, the appraiser or other real estate professionals to tell you whether you’re getting a good deal. Professionals should know the market, and it’s easier to rely on them than to try to understand the data and make an informed decision on your own. Unfortunately, relying on this mindset can lead to big problems. Everyone you deal with has their own agenda, and may not have your best interests in mind. Additionally, no-one can accurately predict a real estate market, and you can’t rely on other people to do it.  

Real Estate Professionals Have Agendas

First and foremost, remember that real estate professionals have their own agendas. Many of them get money when you buy a home, so it’s in their best interests for you to buy. There are a lot of honest real estate professionals out there who are absolutely trustworthy, but there are also some unscrupulous people who would take advantage of you in order to make money. You can’t always rely on real estate professionals to give you an unbiased opinion because they have their own agendas.

No-One Can Predict the Real Estate Market

As much as you might want to believe there’s a magical formula that can tell you how to make money in the real estate market, the truth is that no-one can predict what it’s going to do. You can look at economic indicators and historical housing trends to make an educated guess, but everything from natural disasters to a large business moving away can have a drastic and unanticipated effect on the local economy. Do your own research to form an educated guess about what the housing market is doing, but keep in mind that it’s only an educated guess – no-one can predict the future.

Some sellers have an appraisal performed on their property before they put it up for sale to determine the value of the property. A seller then uses the appraisal as a selling tool; a cornerstone for determining the home’s value and validation for the buyer that the home is worth what the seller is charging. As a buyer, you should take these appraisals with a grain of salt. They can be helpful in setting a ballpark figure for cost, but you should do your own footwork before you agree on price.  

Appraisers aren’t Inspectors

First and foremost, it’s important to remember that an appraiser isn’t an inspector. A good residential appraiser who has years of experience and has inspected many homes can learn to spot some of the most serious home problems, but it isn’t an appraiser’s job to conduct a home inspection. Appraisals assume that the underlying structure and foundation of a home is in good shape and price the home accordingly.

You should always have an inspector in to review the property before you close negotiations on price. An inspector may find issues with the property that will drastically affect its price; from $10,000 repairs to $40,000 structural issues. You would then want to negotiate that much off the appraisal to arrive at the home’s true value.

Not All Appraisers Agree

Another thing to note is that not all appraisers agree. A property appraisal can be subjective. You may have two appraisers in to appraise your home and get appraisals $5,000 apart, $10,000 apart or get even more drastic disagreements on price. It’s important to remember when you’re dealing with a seller who has an appraisal that the appraisal is only a ballpark figure. If a seller gets an appraisal listing the home’s value at $160,000 and is unwilling to budge a penny below that number, you might want to walk away.

Overpriced homes seem like an easy thing to avoid, right? All you have to do is look around the market and check comparable sales to see how much homes are selling for and determine whether the home you’re buying is a good deal. While this is sometimes true, it can also be true that the housing market reflects an inaccurate picture of current market values. You may need to pay a little more attention to avoid overpriced homes, and beware of price-related sales tactics.  

A Lower Price Might Not be a Bargain

One tactic that some real estate agents use to try to sell a home is to take home buyers around to look at three or four homes that are overpriced. Many homeowners don’t have an accurate idea of what the market prices should be, so the first three or four homes they see set the expectation for market prices. Then, when a home buyer sees a “bargain” home, the price difference can seem like a dream come true. Buyers may be pressured to make an offer right away because a home that cheap won’t last long.

Unfortunately, you can’t take a market at face value like that. Especially during a downturn or slump in the housing market, you’ll find that many or even most of the homes on the market are overpriced. Homeowners try to sell based on their expectations of the old market. The homes sit around for months not selling, and prices fall lower and lower.

Then when a new home comes on the market and is accurately priced for the current market, it may seem like a bargain – but is actually just a reflection of the current market. Just because the other homes are overpriced doesn’t mean a ‘cheaper’ home is a bargain.

When you evaluate home prices, look at the current market and how long homes have been on the market. Comparable sales 6, 8, or 12 months ago don’t give you an accurate idea of today’s prices. Likewise, homes that have been on the market for 6 months or more are probably overpriced. Beware of judging home prices relative to overpriced homes, as you probably aren’t getting the deal you think.

Home sellers and home buyers often have far different ideas of the value of a home. Sellers are almost always asking too much for a home, and buyers typically have a good idea of the home’s actual value. How do you bridge the gap between buyers and sellers to get the home you want at a reasonable price?  

Seller’s Syndrome: High Asking Prices.

It’s human nature for sellers to want to get the highest possible price for their homes. They may look at the housing market and decide that because their home is in better shape than some of the comparables, or the outside has been painted more recently, or has some otherwise relatively intangible benefit, it’s worth asking for more money. Some real estate agents also tell sellers to ask high prices in order to leave room for negotiation. In reality, high prices can just put off buyers.

Buyers have a better idea of realistic values.

Buyers are typically better-educated than sellers, because they’re looking at multiple homes in various neighborhoods and have a good sense for comparable properties. Sellers don’t have to be overly educated; they typically rely on their real estate agent to convey value and other important property information. Buyers, on the other hand, do a lot of homework, and know what they’re willing to pay for comparable properties.

Meeting in the middle: where buyers and sellers agree.

In theory, the price where buyers and sellers agree is the fair market value. Fair market value is what the buyer is willing to pay, so it’s a fairly arbitrary number and only depends on the buyer and seller. In reality, the fair market value is typically a bit higher than buyers want to pay, and somewhat lower than sellers want to sell. Be prepared to educate sellers, including providing information on comparable properties and your financial resources, in order to get the deal you want. You might have to compromise and meet in the middle.

Median home prices are something you’ll hear about over and over again when you’re home shopping. Your Realtor may tell you about median home prices, and use it as a way to compare potential houses in your marketplace. Unfortunately, median home prices aren’t the ultimate evaluator of homes in your area. Educate yourself about the myth of median home prices.  

What is a median home price?

The median home price is the midpoint for home prices in your area. It’s not the average, which is a common misconception. It’s the middle number in a range. Consider this example:

1, 10, 12

The median in this set is 10, because it’s the number in the middle of the set. The average, on the other hand, would be 7.66, which is the sum of the numbers divided by the number of numbers.

A median can be a completely arbitrary number, if you have a broad range or a range that’s skewed in one direction. For example, you could have the following set:

1, 2, 3, 20, 25

And the median is 3. The average in the above example would be 10.2. Neither number accurately reflects the range of numbers, the average value or the range in which the majority of the numbers occur.

What a median home price can’t indicate.

As you see, a median home price doesn’t give you an average home value. It can’t tell you how much homes in your neighborhood typically sell for, if there’s a broad range. It can’t tell you if the home you’re considering is in the right price point for the area. Many people misuse the median home price, and don’t understand what the data actually means. Medians can’t tell you how many bedrooms a home has, or what the average square footage of a home is. It’s a misleading and often misused number. Even real estate agents sometimes get this wrong, mistaking median for average or otherwise manipulating the numbers.

What a median home price can indicate.

The one thing a median home price can do is give you a basis for comparison with other medians. For example, if you’re looking at a home in an area in which the median home price is $200,000, and another area you’re considering has a median of $700,000, you know there’s a general disparity in home prices.

You can also compare today’s median home value in a neighborhood with the median home value X years ago to get a sense for which direction the home values are moving. For example, if the median today is $200,000, but the median 10 years ago was $150,000, you know that the median now is higher and home prices have probably gone up in general.