How does a real estate agent value a house?

The process of how a real estate agent values a house can be a complicated one.  There are a lot of factors that are taken into account when valuing a home for the market--everything from square footage and number of rooms, to the age and condition of the property.  Often times your agent will resort to one of a number of common valuation methods.

The most common methods for how to calculate the worth of a home are: A comparative market analysis and Cost Approach. Each one has its own strengths and weaknesses which you can read more about below!

Comparative market analysis

The comparative market analysis (CMA) is one of the most common ways for real estate agents to value a house. There are several parts to this method, including how to get information about comparable properties that had sold and how to use that data in your home's valuation. You may also hear it referred to as a competitive analysis or price assessment.

The CMA is based on how an average house compares with other houses in the area, which allows you to estimate how much yours should sell for so long as there isn't something special about it compared to those others houses. If the home does have any defining features such as an updated floor plan or an awesome view or design, then you may be looking at added value to the property.

A normal CMA will involve using recent sale prices of similar homes in the area and how long they were on the market before that sale, how many bedrooms and bathrooms they have, how large the lot is and how big it is in square feet. This information will be used to help determine how much your home could sell for. Of course, there are other factors to consider like how old or new a house is as well as ongoing repairs needed by a homeowner.

Because value is subjective, you shouldn't rely on one CMA by itself if you can help it. You might find that using several CMAs from different real estate agents will give you more accurate results than just one; and also help you to narrow down the agent you work with!

Sales Comparison Approach

Comparative Market Analysis (CMA) is somewhat reliant on the closely related SCA.

SCA, which stands for the Sales Comparison Approach, are used as guidelines in determining values of local properties with similar features within the same geographic area.

This is how real estate agents determine how much a house is worth per square footage when using this method of how to value property. The sales comparison approach to determining the value of a home looks at how many similar properties sold for in the area and how much they sold for per square foot. It is based on the average sale price of homes that were listed and sold within a one mile radius.  

A real estate agent will then try to determine the number bedrooms and bathrooms the home has, how big the lot is, how old it is, and other relevant information about how long it will take to build a similar property from scratch using the cost approach method above. This gives you an estimate of how much any particular house is worth per square foot or how much profit there's likely to be!

Cost Approach

This method of how to estimate the value of a house uses market driven rates for how long it takes to build any property in the area along with local material costs and labor costs. It looks at how much money it would take to build a home from scratch. Hence why it's also called replacement cost or reproduction cost.  

Real estate agents may use this method when there is no comparable market price for how much similar properties have sold for in the area.

Be careful how you use this method if the home has been renovated recently as it can result in an over-valuation of how much your property is worth.

Cost-plus Method

The Cost-plus Method is a valuation method utilized by determining how much money needs to be spent on a house to have everything updated so it is in peak condition.

It's a bit different from the sales comparison approach method because they don't look at how many houses are listed within one mile or how recently they sold, but how much has been spent on similar properties that were listed and sold within the area.

Conclusion

There are definitely more than a few ways to get a fair valuation on your house.  Which one you or your real estate agent uses may be entirely dependent on the circumstances of the sale, the state of the market, your location etc.  

In many cases for an accurate valuation of the home, you'll want to get the home appraised for a final and accurate comparison against what your asking price is.  If it falls in line with what you are asking, your chances of selling at that price will definitely be higher!

What are your thoughts on how real estate agents estimate the worth of a home? Have you had any experiences with this yourself? Let us know by commenting below, and if you are interested in selling your home and closing fast, contact us ASAP so we can help!