How to Gauge a Home’s Value
It’s the one thing that will determine whether your next real estate deal is a bargain or not.
Simply put, you can gauge the value of a home on your own.
But you don’t have to be an experienced real estate investor to do your homework here. While it might seem that some savvy real estate types can look at a neighborhood and a piece of property and gauge the value within $5,000 or so, that doesn’t mean you can’t.
You just need to know how. Here are some tips for doing your homework and gauging an accurate value on a home:
Examine Data in Your Local Market
You’ve heard the old adage: location, location, location. There is no single factor more important to gauging a home’s value, perhaps, than its location. That means you need to look at the current market data in your area to get a sense of average home values in the neighborhood.
One good metric to use here is dollars per square foot. After all, one large home in a neighborhood isn’t going to be the same value as a home that’s half as large. But if you calculate dollars per square foot, you’ll get a sense of the average home price for the location.
This isn’t a final formula, but it can be a quick and dirty way to gauge the approximate value of a home: look at a few sample sizes of homes in the area. Run the data for the previous sales prices on these homes, and then divide those prices per square foot.
With that data, you’ll be able to sit down and look at the $/square foot statistic throughout the neighborhood. You can then use that number to approximate the value of the home you’re looking at.
Does this mean you’ll absolutely know the price of the house when you run this formula? No. But it does mean you’ll have a reference point from which to work.
Use the FHFA HPI Calculator
If you want another reference point, here’s a tool you can use today: the FHFA HIP calculator.
This is not the current value of a specific home.
What this calculator does is take the state the real estate is located in, cross-referencing with the purchase quarter and the valuation quarter. In essence, it’s a way of gauging value using both time and location.
You can then use the previous sales price on the home you’re looking at—using a tool like Zillow, for example—to enter in “purchase price.” This will help you understand if the local housing situation might change the environment that leads to a major increase or decrease in price.
Again, this is not a perfect tool. However, when you use both this tool and the techniques above, you should start to get a sense of how valuable the home is. Is it severely overpriced? Severely underpriced?
Is the price within the approximate range of its value?
Do your homework like an investor and you’ll be surprised at how much you can learn about a home.