Boston

[Josh_H2Otown]

Hi all,

When trying to assess the fair market value of a home to make an offer, how much of a factor are market trends versus recent comps?

To give some context: Watertown is among the areas I'm considering for my upcoming first time home purchase. One condo in my Redfin favorites is listed at $355k. It last sold for $322k in 2006, near the top of the market. The comments claim that since the last sale, some kitchen work has been done (cosmetics such as tiling + new appliances) and the bathroom has been completely redone.

Now, Watertown's median sale price (single-families + condos) has declined from ~$365k in 2006 to ~$348k at present, about a 5% drop. Therefore, in this example, would it be reasonable to use 95% of the last sale price plus some amount to account for the renovation costs as a benchmark for an offer?

I know that a million factors play into the fair market value of a home, but are town-wide sale price trends since the home last changed hands an important one?

When browsing the listings, sometimes I will find a home that looks great, was sold for x during the bubble years, and is now listed for x plus $20-30k or so with no mention of major improvements undertaken during the last ownership. Is there a basis for pricing a home in a fashion that seems to be out of whack with the market trends of their location, or are such sellers simply setting themselves up for disappointment?

Thanks for your thoughts!

[JimR]

"I know that a million factors play into the fair market value of a home, but are town-wide sale price trends since the home last changed hands an important one?"

IMO, no.  Town-wide (or city-wide if you prefer) data is really only useful for comparing that town against another town with other similar demographics.  There is seldom any correletion to between town-wide data and a single specific piece of property from what I've seen.  Most of the stats you see for that sort of thing are based on the median.  It gives you little to no info about anything above or below the median.  (If you use a 3-house example:  House A's sale price goes up 500% over a last sale in 2006.  House B's sale price goes up 14% and House C's price goes down 60%.  The median is +14%.  If you are looking at a house that is identical to House A or House C you're going to be way off.)

[Josh_H2Otown]

Makes sense, JimR. I guess you'd need to figure out the price trend of properties comparable to the one you're interested in, over the time frame since it was last sold, to get any kind of gauge on whether it is valued fairly - and then somehow reconcile that with current comparables.

But I'm curious: assuming that the "median home" in a given area has remained pretty much the same over the time we're considering, and absent any major improvements to a given property... if the property is in an area whose median price has gone from x in 2005 to x-15% today, and that home sold for y in 2005 and is listed at y+10% today... what could justify the higher asking price?

[JimR]

Could be any number of reasons. Maybe the town has had a high number of foreclosed homes or short sales and those have been balanced out by a rise in sale prices for other homes that weren't distressed sales. The median could very well stay the same. Maybe nothing happened to the property itself but something very desirable happened across or down the street? Since you are looking at condos, maybe the condo association did something that makes that specific complex or unit more desirable?  Maybe other nearby condo associations did something that makes thier units less desirable?

But I think the entire approach you are taking here is problematic. In trying to determine the value of a property you are taking it's last sale price and going up or down based on trends. How do you know the last sale price was an accurate representation of FMV to begin with? What if the house sold for 15% below FMV last time it sold? (It could have sold for more than FMV just as easily.) If it sold for 15% below FMV last time and they're listing it up 12% from that then they'd be pretty close to the true FMV. If it sold for 30% over FMV value last time and we accept a trend of a decrease of 15% since then, you'd still be paying 15% over the house's true FMV.

[Steve_Sadler]

@Josh_H2Otown - Town wide sales price trends likely will not provide a good basis for determining fair market value.  

However, if you are buying a home that will be largely financed by a Lender, neighborhood market trends will definitely play a role when a lender requires an independent appraisal.

As part of the appraisal process, licensed appraisers factor in neighborhood characteristics such as  Inventory Analysis,  Median Sale & List Prices, Days on Market, and Sale / List %, and # of Foreclosures.  There are also other neighborhood factors used in the appraisal process for condos or cooperatives.

You can look at the Uniform Residential Appraisal Report and FAQ's regarding market conditions by following this link --> https://www.efanniemae.com/sf/formsdocs/forms/1004.jsp 

Edit:  This is not the only factor used when determining market value. Comparable sales are used as well.   I believe the purpose of market trends is to increase the transparency of the appraisers conclusions.   Something to keep in mind though, when you are looking to submit an offer on a property. 

-Steve

[Josh_H2Otown]

@JimR,

Yeah... I'm starting to see your point. Thanks for helping me deconstruct the thought process.

@Steve_Sadler,

Thanks for the Fannie Mae FAQ... it will be valuable.

By the way, I think we have worked together before... we both know a gentleman named Kirk...

-Josh

[Steve_Sadler]

Josh, we can talk real estate next time I am in the office 

[Josh_H2Otown]

Sounds good Steve. Looking forward to it!

[peterphinney]

The basis for pricing a home today is recent sales within a 1-1.5 miles, or so, of the subject property. Are there comparable sales in the last 6-12 months that support the value you are willing to pay or that the seller is asking? I love to do historical trending analysis as well, but I will be the first to note that there are many "micro-market segments" that need close analysis to get this data right. Comparing the $350-$400k condo market in one part of Watertown with what has gone on in the higher-end single family market is really apples and oranges. Also do not expect to get the opportunity to present your historical analysis to the seller as they are not interested. One trend often overlooked is that of similarly sized and located properties on the market now. If all the listing agents are asking $350k + for something you are thinking  is worth $300k -- there is something wrong in your analysis.Likely the agents have factored in the law of supply and demand. Lower inventory leads to higher prices whether there is a good historical basis for this or not.

[LeonardVice]

Both can be a huge factor and weighing them both for your market goals is a risky and tough task to do.