When someone buys a home to be their primary residence the last thing they are thinking about is selling it. Ultimately, that day will come when they are ready to move on. It is then they may question if they paid too much and should have considered future home value.
One of the great things about being in the real estate business is helping someone realize their dream of home ownership. In many cases, we, as real estate agents, embrace that dream and want nothing but the best for each and every customer we represent. We make sure the terms and conditions of the sales agreement are fair and protect the rights and desires of our client. Maybe above all, we want to ensure our home buyer pays a fair price, or less, for their dream home.
One of the first things an agent does after their customer has found a home is to complete a value analysis. The analysis often includes a study of comparable homes that have recently sold. This study provides price guidance and insight as to the market value of the new dream home.
The practice of completing a market analysis on the subject property is ordinary and necessary. If the buyer needs a mortgage to purchase the home, it will have to appraise. Most appraisers will not use comparable home sales further back than six months, so the same practice is often used by the agent.
There are many ways to assess the value of a home. Rarely does any discussion happen in regards to what the property may be worth in the future? After all, this is today’s dream and this future value, if any, will not be considered by the mortgage lenders or appraisers anyway.
To better understand how future home value can impact on today’s valuation let’s take a quick look at a place like Denver, Colorado. Over the past 4 or 5 years, the property values in Denver have risen about 9% year over year. If you purchased a home in Denver for $400,000 in 2011, today that home would be worth $615,000 ($400,000 / 5 Years @ 9% compounded annually). WOW!!! This price escalation is why many who moved to Denver are willing to pay $450,000 for a home that appraises for $400,000. These home buyers have to bring the difference in cash between the appraised value and sale price, and they do it! That is aggressively following, and paying for, your dream.
Imagine selling homes on Wall Street. Investors would likely use a forward-looking equity model when considering property value. The value of Stock is measured according to what the companies will be worth years from now, not today’s book value. This practice demonstrates future value dictating today’s value on steroids.
Historically, real estate in Berks County does not rise to the levels of large, robust cities like Denver but Berks home values have held their own. Berks home buyers tend to do more home purchasing with their heart which means future home value does not have as significant an impact in Berks as it may in larger metropolitan areas. This effect is a positive reflection on our communities and a reason why the transiency rate is so low.
It is my opinion that the real estate landscape in Berks County will soon see positive change. To what degree remains a mystery. If our legislators get around to the business of property tax reform, creating more jobs, and cleaning up the pension issues, things could improve in a hurry. After all, Berks already has great schools, great scenery, and great people.
For now, it is a good thing people buy their dream home in Berks with their heart and not in consideration of future value. It is my hope they are greatly rewarded. It is a dream I have.
Knowledge is Power!