How to Spot Overpriced Houses – Real Estate Experts Reveal 3 Techniques Everyone Can Use
Where is the line between regular real estate prices and overpriced houses that would burden your budget (and bury it closely after that)? We asked real estate experts for advice and set up a set of 3 simple techniques on how to spot overpriced houses and get your dream home for a fair price.
There are many reasons why home sellers set the initial purchase price way too high. In the majority of cases, they assume – and truly believe – their house is worth the irrational sum they’ve come up with. After all, they’ve invested a vast amount of time, money and energy into it and it’s a place they love and cherish.
Sometimes, they’ve seen a similar house online and simply think hey, my house is better. It should therefore cost more than that!
But guess what: this is not how fair purchase prices are determined or evaluated.
Real estate appraisals are usually and ideally performed by so called real estate appraisers, who have specific methods and tools to determine the precise and fair value of a property. In order to assure that these values match the status quo, their methods are more or less regulated – depending of course on the country, state or city.
Luckily for us, they’ve shared a simplified and non-expert-friendly version of the calculations they perform which can ultimately help you spot overpriced houses and avoid overpaying for a house you’d like to make an offer on.
Technique: Compare the Purchase Price to Similar Objects.
The first and easiest way to determine whether or not a house is too expensive and if the home seller stipulated a price way above market value is to look for houses with similar features and compare their prices.
Make sure the houses you compare are similar at least in terms of the following factors:
- Type of construction;
- Construction year;
Professional appraisers make use of databases of local appraiser networks, but for rough estimates, good old Google could give you a pretty decent idea of the required real estate prices as well.
Even if you weren’t able to find anything useful, there is hope for those who are looking to spot an overpriced house: overpriced real estate can often be easily identified, as its price stands out from similar offers – for no apparent reason.
Even though they might not be fully aware of it, this is a big disadvantage for home sellers: in today’s globalized market place, too expensive houses lead to remain unsold for a long time.
The good thing about that is that if you know how to spot an overpriced house, you can try using it for your advantage. With the right negotiation skills, the house seller might be willing to lower the price and ultimately close the deal.
Technique: Compare the Purchase Price with the Price of a New House.
This is a neat method of spotting overpriced houses that can lead to surprisingly tangible and workable results.
What you will in fact get to know is whether building a new house of this type from scratch would cost more than acquiring the one that is already built – and whether you would overpay by buying this house.
First of all, the value of the building and the property value are determined separately. To get to these values, try using the above-mentioned technique 1.
As the building value is decreasing each year you’ll have to deduct a certain percentage from the previously established price that will represent this fall in value and give you a more precise idea of the real purchase price of this property. This percentage is determined with regard to the following points:
- When was the house built?
- Have there been any serious fix-ups or repair works that could affect the building value?
What’s important for those who are trying to spot an overpriced house: home sellers sometimes try to charge extra because they’ve taken care of certain damages, even though they’re simply part of a healthy maintenance process. Don’t fall for that.
- After how many years will this house have to be renovated from the ground up? The total time of use of a real estate property is about 80 years. After that, the house should undergo a series of reconstruction works. And they are usually jaw-droppingly expensive.
A standard value for real estate buyers is about 1.25% per year, which have to be deducted from the current value of the particular building. This way, you will be able to obtain a more elaborate and precise idea of the purchase price and be able to spot an overpriced house.
Ask yourself then what the price of a new house would be – how much more would you have to invest in order to have a new house? If there is a substantial difference, you could have a valid argument to make more room for negotiation.
Spot Overpriced Houses by Determining Their Profitability Level.
This method focuses primarily on determining how high the annual rent would be and whether this sum would be profitable in the long run.
This way of figuring out whether you’re dealing with an overpriced real estate property is particularly useful for those who are looking to buy a home which they’re going to rent afterwards.
A rough estimate of the annual sum you could earn by renting the property would allow you to find out after how many years you’ll be able to profit from this purchase.
If planned properly, investments of this kind could be a very smart move, as leaving your money in a bank is no longer very profitable due to the rather low interest rates.
Bear in mind that the location thereby plays a big role: the better the location, the higher the potential for an increase in value. This will also affect your annual profit that could increase after some time – if the location is right.
How Much Is Really Too Much?
All of the above-mentioned techniques only give you an approximate idea of the real estate prices – official calculations used to appraise real estate value are highly complex.
If you’re just interested in spotting overpriced houses and avoid overpaying for a house, the methods we’ve shared could be very useful. Additionally, you could check out Investopedia’s helpful guide for getting a fair price on houses.
If you require an exact and official value though, it’s definitely better to turn to a professional real estate appraiser or ask your realtor about the average price for a home of this type.
Investing in real estate is, after all, a very big step that will be part of your financial plan for several decades, and anything that can help you spot an overpriced house in time and help you get to your dream home for a fair price is certainly worth the effort.