Do surrounding SFH influence price of selling your SFH?

7 Replies

Hello BP,

So the discussion came up yesterday with my mother about her current reno. Bought a 300k foreclosure, so far 200k in reno added with still 50k-80k to go. We talked about possibly selling at some point and what the numbers would be. As numbers started to fly, I asked "What are the numbers for the surrounding houses?" and she replied, "Those houses don't matter".

.

  1. Does she have a point? 
  2. Do the surrounding homes have an influence? 
  3. If they do, why?

Is her house going to look like every other house in her neighborhood? If so then you'd better believe they matter.

Is her house a ginormous mansion when everything else is a 3 bed 2 bath or so different than surrounding properties that they're not really comparable? Maybe not so much then.

But generally yes comps matter. Ask any real estate agent.

Hi Austin - I’m an agent with 7 years of experience in Colorado Springs. Surrounding homes most definitely affect what you can sell for as in order to get a loan, the home has to appraise. I’ve had some tough appraisals in our ascending market but have been able to win all of them for my sellers. However the appraiser has to have the data to back up the price for the loan underwriter. Some buyers may bring cash over appraisal which has been happening in Denver for the past couple of years but even a cash buyer is going to want data to show them they aren’t paying too high above what that neighborhood is worth at that particular time. Most appraisers I’ve worked with try to stay in the same sub area as the subject property and if no comps are available there, they try to stay within 1 square mile. Hope that helps!

@Austin Fox

You mentioned that you bought a $300k foreclosure. How did you come up with that $300k figure? Most likely, you used surrounding comps. Here are the ways you can value real estate: 1. comparative market analysis based on "the surrounding houses", 2. the replacement cost, or possibly 3. the income approach. The income approach is typically only used for large multi-unit properties >4 units where you use the market cap rate for the type of property you are valuing. The replacement costs are typically higher than the sales comparison approach or is simply not applicable due to no land being available to purchase near the subject property. 

So why is sales comparison valid? Think about it this way - if there are 4 other similar homes around yours that are selling for $25k less, the buyers will be much more likely to buy those homes and yours would not sell. If there are 4 homes that are all $25k more than your home and then they see yours (as long as its in similar condition), they will likely buy yours after seeing the more expensive properties. So make sure that the "surrounding properties" are similar in size (both square footage and number of beds/baths) and then you can use these to help see the value of your property. You will likely need to make some adjustments to see the value of your home as these homes are likely to be different in some aspect (larger, smaller, more/less beds, corner lot, ect).

Hope this helps

Did she indicate why she thought surrounding homes didn't matter? How would you determine value otherwise? Is it possible that her house is becoming an over improvement for the area?

Originally posted by @Phillip Bicker :

@Austin Fox

You mentioned that you bought a $300k foreclosure. How did you come up with that $300k figure? Most likely, you used surrounding comps. Here are the ways you can value real estate: 1. comparative market analysis based on "the surrounding houses", 2. the replacement cost, or possibly 3. the income approach. The income approach is typically only used for large multi-unit properties >4 units where you use the market cap rate for the type of property you are valuing. The replacement costs are typically higher than the sales comparison approach or is simply not applicable due to no land being available to purchase near the subject property. 

So why is sales comparison valid? Think about it this way - if there are 4 other similar homes around yours that are selling for $25k less, the buyers will be much more likely to buy those homes and yours would not sell. If there are 4 homes that are all $25k more than your home and then they see yours (as long as its in similar condition), they will likely buy yours after seeing the more expensive properties. So make sure that the "surrounding properties" are similar in size (both square footage and number of beds/baths) and then you can use these to help see the value of your property. You will likely need to make some adjustments to see the value of your home as these homes are likely to be different in some aspect (larger, smaller, more/less beds, corner lot, ect).

Hope this helps

 Thank you for taking the time to explain, that's what I thought as well. The renovation was an addition of a garage and entire inside renovation to everything but the overall blends with the surrounding homes. Nothing too crazy compared to the other homes. However, some people are building nearby brand new houses much bigger than ours so I will continue to keep an eye out! 

Originally posted by @Hillary Gries :

Did she indicate why she thought surrounding homes didn't matter? How would you determine value otherwise? Is it possible that her house is becoming an over improvement for the area?

 My guess was the land. The houses nearby are all over an acre. People nearby are building houses bigger than ours so its diversified. You have homes that are in 400s all the way to the high 900s+ but those are the newer homes. The goal is to eventually sell in a year or two when the bigger homes get built so we're not the top dog asking for too much.

The newer, larger homes would not be considered comparables. (My assumption is your property is older, less square footage with a smaller lot). However, it sounds like there are homes in the immediate subdivision with similar size, age and style. These would be the ideal comparables for your property. If they aren't renovated similar to your property, you will need to add a condition adjustment.

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