There are 2 major methods in which agents establish the value of your property. Firstly, they use the CMA or Comparative Market Analysis method; and secondly, the Comparative Cost method. There is a third method, which uses the income as a method of establishing value, but this is mainly used in commercial or investment properties.
Comparative Market Analysis
Definition of a Comparative Market Analysis (CMA): Determining the highest possible price at which a property will be successfully sold within a specific time frame, using methods of comparison.
The optimal price range at which your property will sell for its highest asking price is called a market value parameter.
Methods of Comparison:
Successful recent sales indicating what price the current market accepted for similar properties.
Properties currently being marketed – i.e. your competition.
Your Agent’s experience as a Property Specialist.
This method of analysis is the most accurate, given that it is the price that other comparative properties in the area have achieved in the recent past. No two properties are alike though, so this should only be used as an indicator.
Comparative Cost Method
A spec-built home, which is a home built with the express purpose of resale, has to be evaluated based on the comparative cost method. The value of the home is determined directly by building costs. This method unfortunately doesn’t take into account that a home is actually only worth as much as the buyer is willing to pay for it at that time, which means that the seller could be in for a quick and painful lesson!
Be careful that you’re not overly influenced by the highest valuation offered by the agent. Some agents will give you a higher valuation in an effort to secure a mandate to sell your home. Remember that the lower valuations might be more realistic. Ask the agent for a justification of the value that is given to you.
You probably also have a gut feel for what you think your home is worth. This is natural, but it may be misleading. You’ve no doubt based this value on a number of influencing factors, which include the cost of buying, your renovations, and a comparison with other properties in your area. The price that you paid to build or buy this home is not a factor that is likely to influence the selling price, since potential buyers are not interested in this. Also remember that advertised prices for properties are not necessarily the final price at which the home will be sold – it’s usually 10% below the advertised price.
When valuing your home, don’t underestimate the wealth of experience that a good agent can bring to this exercise. The most important element should be a comparative market analysis or CMA of other homes in your area. Feel free to request area statistical data from your agent. This will help you to shape your expectations when selling your home by seeing what has actually recently been sold in your area.