Many prospective home buyers do their research regarding an area's "median sales price" before embarking on their house hunt. Based on the statistical data, they establish expectations for how
Median Sale Price And Determining Market Value
Many prospective home buyers do their research regarding an area's "median sales price" before embarking on their house hunt. Based on the statistical data, they establish expectations for how much they'll need to budget in order to buy a home in that region. For instance, according to the Florida Association of Realtors, the median sales price for a home in Tampa Bay was $200,725 as of 2nd quarter 2017. Based on this report, it would stand to reason that it should be fairly easy to find a home in Tampa Bay for around $200,000, right? Well... not exactly. Though it may be possible, it may not be that easy.
Many buyers, especially those transferring to our area, set their budget by these "median price" statistics, but what they find is that though there may be some homes to choose from within the median range, they don't quite meet up to their expectations. These buyers often become discouraged and annoyed by the homes their agent shows them. The median-priced homes may be too far from their job, have only 2 bedrooms, may be miles from the beach, etc. The buyers begin to feel as if their agent isn't listening to them, and their agent becomes frustrated by the lack of inventory that meets the buyers' criteria. It can cause a great deal of disappointment. If the budget is tight, many buyers end up having to give up much of their initial "must haves." What is generally a happy and rewarding experience begins to feel like an exercise in sacrifice.
A possible cause of buyers' unrealistic expectations is simply a misunderstanding of how "median sales price" is calculated. Many mistake the term median to mean the same as average, and assume that these regional statistics are an indication of the typical sales price for the area. Here's an example of how a median sales price versus an average sales price is calculated:
Median vs. Average
The median of a set of numbers is that number where half the numbers are lower and half the numbers are higher. In the case of real estate, that means that the median is the price where half the homes sold that month were cheaper, and half were more expensive.
The average of a set of numbers is the total of those numbers divided by the number of items in that set. The median and the average might be close and they might not. It all depends on the numbers.
Here are 11 fictional home prices.
The median price of these 11 homes is $205,000. Five homes were lower priced and five homes were higher priced. The average price of these homes is $521,272. That's what you get if you add them all up and divide by 11. This is quite a difference!
But as you can see even the average sales price for an area could be skewed if there is an abnormally high or abnormally low sale. It is also important to note that attempting to average out a large region such as Tampa Bay, which includes 4 main counties (Hillsborough, Pinellas, Pasco, Manatee) is an inherently erroneous attempt. Each of these counties is extremely diverse with regard to location, infrastructure, job growth, etc. so that a $200,000 home in Ruskin (Hillsborough county) is going to look a lot different than a $200,000 home in Belleair (Pinellas county). So how are home values determined?
Home values are determined by a set of 5 Key Factors, which are as follows:
Location - you've heard it a thousand times, "location, location, location," but in all honesty this is the #1 value factor. Whether it's the proximity to the beach, or a downtown area, or on a more microcosmic scale - a condo on the 2nd floor versus the neighbor's condo on the 15th floor - location is the one thing that can never be altered. In the Tampa Bay area, the closer a home is to our major bodies of water (Gulf of Mexico, Tampa Bay), the higher the home values will be. The same goes for condos, and within a certain building, the higher the floor (i.e. the better the view), the higher the price.
Size - once location has been determined, homes that fall within a certain range of heated square footage will fall within a certain value range. Recent past sales will show the average sales price/sq. foot and can be broken down even further once the next factor is considered.
Age/Condition - older homes typically sell for less than newer homes, however at a certain point, an older home will become "historical" and then will be more valuable than newer homes. Homes that are well-maintained and have newer major systems (roof, HVAC, electric, plumbing) will sell for a higher price than less cared for homes in the same neighborhood.
Upgrades - a home that has been upgraded according to the trends of the 5 years prior will typically sell for more than outdated homes within a neighborhood/community; however, the increase will certainly be capped by the value range for the neighborhood/community. In other words, a homeowner can't expect to spend $150,000 for Italian marble flooring and sell his home for $150,000 more than his mostly ceramic tile neighbors. This is referred to as "overimprovement" and it is a common mistake that will take a whole other blog to discuss.
Negative Events - a less common, but very real value factor is negative events. Because this is a non-quantitative factor and something that is driven by prospective buyers, it generally results in price reductions, rather than in initial value determination. On a smaller scale, a home where there was a murder would most likely have to be priced quite a bit below the rest of the community in order to attract either an investor or a non-squeamish buyer. On a much larger scale, a natural disaster such as a major hurricane like Irma or Harvey, could have widespread effects on the values of waterfront neighborhoods. Buyer wariness may have to be combated with drastic price reductions, but typically this type of negative impact to a real estate market would be temporary.
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