What, Why, How

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What do people mean by “the market” when they talk about “knowing the market?”

When your friends, family, and realtor advise you to “know the market” before buying a home, they generally mean that you should be aware of what similar homes in the neighborhood you’re searching in are being sold for (not just the asking price—the sales price, too), what the demand for homes in your neighborhood is, and whether sales prices in your neighborhood are increasing, declining, or remaining the same.

Why is it so important to know the market when you are ready to make an offer on a home?

Buying a home is about negotiation. If you don’t know the market, you could end up paying too much for a home, or losing a home to another bidder by making an out-of-left-field offer. Knowing the market will put you in a prime position to be an effective negotiator.  For example, say you find a home you are very interested in, but notice it’s priced at 10 dollars more per square foot than similar properties in the area. Assuming the home is in similar condition, with similar features and amenities, you will be in a good position to bargain the seller down to the average cost per square foot, or even a little bit lower, citing examples and letting the seller know that he is unlikely to get what he is asking for.

Knowing the market can also help you choose neighborhoods in which to look. By knowing the average cost of the type of properties you are looking for in a given neighborhood, you can get a feel for where to focus your search. If a neighborhood’s average is a lot higher than you can afford, you can decide to search in a different area (or prepare to settle for less home than you were planning on).

How can I learn about the market?

Research is a critical component of getting to know the market. Assuming you are working with a knowledgeable buyer’s agent, he or she will let you know how a listing price stacks up against the rest of the market. However, be warned – it’s always best to do your own research as well, to supplement your agent’s advice. Why? If you buy a home at a price higher than its market value, your agent profits in two ways: the seller will be more apt to sell so the agent will receive a commission more quickly, and the agent will receive a higher commission due to the higher selling price. Therefore, there is no substitute for doing your own research on the market, even if you trust your agent.

So, how do you go about doing research? You can see listing prices on comparable homes by looking at the internet ( www.realtor.com is a good resource for this), but much data found online includes prices that are: a) higher than those sellers are actually willing to take and b) in some cases, reflective of unrealistic sellers. So, you can’t rely on this approach entirely.  Ask your agent for “comps” (a Comparable Market Analysis) – he or she will have access to more data than you do because his or her listings database includes historical sales data. “Comps” provide information on properties similar to those you are interested in buying, giving you information on key features of similar homes (e.g., # of bedrooms and bathrooms; square footage; listing prices; how long they were on the market; and, if the homes sold, what they sold for.) The selling prices are far more useful than the listing prices, as they tell you what buyers are willing to spend, as opposed to what sellers are asking for. Beyond “comps,” there are also resources on the internet that can help you determine the value of a home, such as this Free Home Valuation Service.

Analyze the information you’ve gathered to determine whether the home you are interested in purchasing is priced at market value. Through your research and analysis you should become knowledgeable on the following:

  • The average price per square foot for comparable properties. (Very few homes are exactly the same size, so knowing price per square foot helps you compare the prices of homes with varying square footage.)
  • How quickly (or slowly) homes seem to be selling. (This gives you an idea about the demand for homes in your area – when demand is high, homes often sell very quickly. When there is less demand, homes often stay on the market for months, and it is often easier to bargain with sellers.)
  • Whether homes seem to be selling above or below listing prices, and if so, at what percentage above or below. (This will help you negotiate realistically and effectively.)

Once you’ve gathered the appropriate information, analyze it to determine market value in your neighborhood. What is the average cost per square foot? Do difference in the amenities and conditions of the homes explain away any differences in price amongst the properties? To determine this, ask yourself the following questions:

  • How much property does each home come with?
  • Are all of the homes in the same, or equally good, school district?
  • How long did the property take to sell?
  • Did the properties put on the market eventually sell, or were some pulled off the market?
  • Are the properties all in move-in condition?
  • How much do amenities such as pools, beachfront property, historical details, remodeled kitchens, proximity to stores, etc. seem to impact the asking price?
  • Are homes being sold at, above, or below the asking prices? If below or above the asking prices, at what percent below or above are they being sold?  

Practice what you learned

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