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.