Home Valuation Trials: Comps & Intrinsic Value:

Most realtors advise clients on home valuation by pulling similar recent market sales (‘Comps”) and comparing them to the subject property. This source of home valuation data is less and less meaningful as similar ‘Comps’ have larger and larger spreads. The result of larger spreads in ‘Comp’ sales is greater confusion as realtors become story-tellers: we have to explain BOTH the distress in the market as well as the qualitative/quantitative relative differences across ‘Comp’ samples:

Example:
• “This homes was a foreclosure”
• “That home was a short sale”
• “This seller was sick (divorce, job loss... etc.) and had to sell”
• “This home was perfect and three families bid it up… etc.

The above explanation happens coincidentally with the normal qualitative comparing of ‘Comps’ such as:
• “Home A had better sun, but more road noise than Home B”
• “Home C had a great flat lot but wasn’t updated like home A
• “Home Z had 17 cats and buyers couldn’t get thru the front door

At some point almost every home buyer becomes exhausted & thoroughly confused by these layers of explanation and resolves to do their own research. This usually results in an online $/SQFT analysis using AVM data from an online real estate site  like Zillow. 

Once a home buyer resolves to do their own research online using free home valuation data every negotiation suffers. The data is intrinsically inaccurate while also being symptomatic of our times-- the distress evident in the spread of home sale data is impossible to read in the numbers found online.
The process of valuing homes in relation to other homes that have recently sold creates momentum in whatever direction prices are moving.

The comps tell us nothing about a home’s true worth-- only the approximate current market value. Market values are driven by emotion; intrinsic value is a function of the input materials of the house, the lot/location, the local job market & fiscal health of the municipality; the quality of life evident in the communities- over the course of one complete business cycle.

People want to buy homes—it still IS the American Dream.

We have to reprogram the way many buyers think about home value. It is irrelevant that the home next door was distressed and sold for a pittance-- what matters is the intrinsic value of the house relative to what a buyer can purchase it for today. Homes are trading about 12% below their intrinsic value. For more on Intrisic value please goto www.smreb.com.