Just because some folks can afford to buy a home in today’s competitive market doesn’t mean they can afford to overpay.
As housing prices climb, it’s even more important to make sure that your investment is a smart one. It’s not every day you sign up for a 30-year $363,300 loan. Which, incidentally, is the average cost of a new home in the United States as of June 2018, according to the Census Bureau.
And prices are climbing. Home prices rose 7.1 percent year over year from May 2017, according to CoreLogic, with few signs of plateauing even as interest rates tick up.
There’s no guarantee that the house you buy today is priced reasonably or will increase or even retain its value. The best anyone can do is to use the tools and information available to make an educated guess. For buyers, this means talking to your agent and doing some research.
Here are a few indicators that can help you determine whether the house you want to buy will retain its value.
1. Pay attention to how long the home has been on the market
One sign that a home may be overpriced: if it’s on the market longer than average.
Ask your agent to pull statistics on the house you’re eyeing. How long has it been listed? Is that longer than average for homes in the neighborhood? In that price range? For the type of house? Has the house been on the market previously and the listing removed?
“The stats will vary depending on price, property type and even geography. What’s important is to understand what’s average for the property you’re looking at. High-priced homes, typically ranging from $750,000 to $1,000,000, will sit on the market longer than less-expensive property,” says Terra Spino, with EXP Realty in Santa Maria, California.
2. The house is nice, the neighborhood not so much
Generally, homes depreciate over time while land increases in value. The idea here is that your home suffers wear and tear, whereas land does not. A brand new home in a so-so neighborhood might be worth less in a few years than a comparable older home in a great neighborhood.
Consider that homes bought near poorer school districts suffered a 22 percent location discount when compared with all homes in the same county, according to a report by Realtor.com.
Evaluate the features of the area where the prospective home is located. Look at growth opportunities, such as new businesses and mixed-use developments.
“Today’s buyers want to live in walkable neighborhoods. That has value that will probably last,” says Kelly Lavengood, realtor/broker with FC Tucker Company in Indianapolis. “Answer questions like: is the area primed for additional growth?”
Additionally, look for features including nearby mass transit, high-rated schools, and amenities such as parks and popular public spaces.
3. Valuation tools point in the wrong direction
Online valuation tools, also known as automated valuation model, or AVM, are easy ways for buyers to get an idea of how much property is worth.
These tools use information from property transfers, taxes, and past sales to crunch the numbers to estimate a property’s value. This is a good starting point, but not always an accurate picture, says Lavengood. Experienced agents who know the area can put a finer point on home values than online tools.
“Find an agent who is familiar with the area. Real estate is very market specific, so what’s good for one neighborhood might not be good for another,” says Lavengood. “Property values on websites are not always accurate.”
4. The inspection sets off warning bells
Once your bid on a home is accepted, a home inspection will give you additional clues as to market value. Be sure to hire an inspector with experience who comes with excellent recommendations.
A good inspector will also know their limits, meaning if something outside of their expertise demands attention, they will recommend the right type of expert to review the problem.
“Be cognizant of potential inspection issues. Everything’s fixable–it’s just a matter of at what cost and whose cost,” says Lavengood. “You want to make sure you’re not getting into a situation where you can’t afford repairs and it impacts your ability to sell.”