One of the most confusing aspects of real estate investing – especially for first-time or relatively new investors – is determining how much they should pay for a property. After all, finding a great home at a great price is important for securing financing as well as ultimately turning a profit. Several different factors go into determining a home or property’s worth, and you can learn more about these below.
Go Online
It’s the age of information, and that’s great news for real estate investors who want to determine how much a particular home or property is worth. In fact, there are numerous online tools known as home value estimators that can help you decide whether you should bid on a property or pass. These online tools use a bevy of information to estimate a home’s value, including everything from deeds to tax assessments. Keep in mind, though, that while these tools can be helpful, they are never 100% accurate.
Ask a Real Estate Agent for a CMA
Another option available to you is what is known as a comparative market analysis, or CMA. This is a type of valuation in which the real estate agent will do his or her best to come up with a home’s current market value based on factors like square footage, neighborhood quality (crime rates, schools, and more), property value estimates, tax assessments, and even the value of other similar homes in the same area. A CMA can be relatively accurate when it is done by an experienced real estate agent, but again, it is only an estimate and should be used as a guideline.
Use the House Price Index
The Federal Housing Financing Agency (FHFA) uses what is known as the house price index, or HPI, to determine home values. You can even use it yourself with this handy online calculator tool, which works by tracking a home’s change in value from one sale to the next. It seems simple enough, but it’s important to remember that the FHFA only tracks homes with mortgages that fit within federal guidelines, so high-value luxury homes will not be included. It’s also important to remember that the FHFA does not adjust for inflation or seasonal changes, either.
Get a Professional Appraisal
For the most part, the absolute best way to determine a home or property’s value is to have it professionally appraised. If you’re serious about buying the house, your lender will likely want to see an appraisal before approving a loan, so finishing this step will save you time when it comes to financing, too. Appraisers will look at things like the property itself (the improvements done to the house and the value of the land it is on), the local market, and other similar properties. With all this information, it is possible for a professional appraiser to determine an accurate value for the home.
Though things like tax appraisals and CMAs can go a long way toward helping you determine the value of a home or property, they are never perfectly accurate and there is always room for error. Ideally, you should utilize at least two of these methods and compare the difference in price. For the best and most accurate result, it is always a good idea to hire a professional appraiser.
