Sam's Home Buying Tips

How to Avoid the 10 Biggest Mistakes Buying a New Home

Mistake No. 10 – Not Evaluating the Deal

Understand the Value of Each Property

Real estate pricing is a daunting to understand for many reasons including:

  • estimating cost appears to involve a lot more “feel” than science;
  • it’s a constantly moving target;
  • the many variations in improvements and lots among comparable properties make direct comparisons all but impossible; and
  • all the improvements associated with each property can be difficult to value, especially in established neighborhoods.

But, it’s a common mistake to not even try.

As with any large problem, the secret is to break it down into manageable chunks. The ‘Property Value Worksheet’ included in this section does this with a system for identifying and finding sources of the component costs associated with each property. The components included are the unimproved property (e.g., land cost) , the hard construction cost (e.g., basic finished home), and the value of other amenities (e.g., landscaping, walkways, pools, etc.).

One of the best uses of this worksheet is to compare the values of different homes under consideration. Typically this will require working backward from the asking price to identify the cost of the land as a basis for comparison. This is because it is typically easier to estimate the cost of construction and amenities than the price of land. Construction cost can be calculated by multiplying a rough cost per square foot (numerous sources are listed to help with the estimate) by the size of the home (provided on most flyers, advertisements and multiple listing). Even if exact costs per square foot vary from your estimates, it is the relative cost differences between properties that are important. The cost of amenities such as decks, pools and porches can be easily estimated by consulting the sources listed and depreciating based on age and condition. To determine land cost, subtract the estimated cost of construction and amenities from the total property cost.

This process has helped friends and my own family find homes at great prices and avoid overpaying for other homes in the throws of an emotional infatuation. Even if not precise, it’s so important to at least estimate the value basis for the largest purchase of a lifetime.