No magic formula
DETERMINING how to price a house for sale is like working a jigsaw puzzle where some of the pieces don’t fit. Of course, there are tangibles such as the number of bedrooms, bathrooms and square footage. But what about features that may matter to one person -- a swimming pool, for instance -- or be meaningless to the next -- a professional Viking range for a bachelor who lives on takeout? How do views, zoning for horses or quality schools figure in?
“Pricing a house is and probably always will be somewhat of a mystery,” said H. Alan Mooney, president of Maine-based Criterium Engineers, an engineering firm that inspects more than 25,000 buildings annually nationwide. For sellers, the key consideration is: “What’s the highest price I can ask and still sell it?”
The answer is determined by a host of factors: location, the cost of land, construction costs, quality, regional features and the home’s amenities and condition.
The real estate market may change, but Ed Leamer, director of the UCLA Anderson Forecast, said real estate’s mantra -- for new or existing homes -- does not. “Ask most real estate agents what determines a home’s value, and they will tell you three things,” Leamer said. “Location, location, location.”
Builders, such as Dave Odle, owner of Manhattan Beach-based Odle & Son Construction, agree.
“One home in the Manhattan Beach tree section listed at $2.7 million. A similar house three streets over is listed at $3.5 million. The difference is location,” said Odle, noting that the more expensive home is on one of Manhattan Beach’s sought-after gaslight streets.
Locational price differences hold true for the broader picture too. April median asking prices for 2,150- to 2,250-square-foot single-family homes ranged from $383,945 to $576,990 in Los Angeles County and from $757,600 to $1,330,015 in Orange County, according to Patrick Duffy, former managing director of consulting for Hanley Wood Market Intelligence in Costa Mesa.
Beyond location, one starting point in pricing a home is to look at hard costs. When it comes to new single-family homes, Stephen Melman, director of economic services for the Washington, D.C.-based National Assn. of Home Builders, said the general formula is to attribute 25% of a home’s price to the cost of the land, 50% to total construction costs including labor and materials, and the rest to marketing and financing.
The percentages differ somewhat in the Southland, however, where land accounts for 30% to 50% of a home’s price, Duffy said. In some cases, the land value on teardowns for custom building has accounted for more than 50% of the listing price of homes constructed by Odle’s company, which builds 12 to 15 a year.
Although costs for nails and lumber may not vary significantly state to state, Atlanta-based Reed Construction Data estimates that premiums on concrete, fuel and wages can bump Southland building costs 12% to 15% above the national average of $111 to $120 per square foot. In custom building, Odle’s construction costs can reach $250 to $325 per square foot.
Also adding to the cost are government regulations that tighten building standards and fees imposed on new home construction, said Kristine Thalman, chief executive of the Building Industry Assn. of Southern California’s Orange County chapter.
“For example, the construction fees on an average new home built in the city of Irvine can exceed $60,000 in many cases,” Thalman said. “That figure does not include other fees imposed on land development factored in prior to construction.”
The features in a home play a role in determining price. And their value can change over time. Avocado-green kitchen appliances and shag carpet -- once the rage -- now scream “fixer.”
Energy-efficient homes are gaining favor with buyers, who will pay 11% to 25% more for “green” homes, according to a recent Imre Communications and Green Builder Media study.
Upgrades affect price, said real estate appraiser Katherine Owen, owner of Agoura-based California Appraisal Group.
“If you had two homes of the same floor plan and one home had a full kitchen remodel and the other didn’t, there would be an adjustment for this upgrade,” Owen said. But determining that difference is less than an exact science. The adjustment, she explained, would be based on “the quality of the remodel combined with the market reaction to the upgrade.”
Even with comparable homes, experts say yard size, proximity to local parks, landscaping, whether the home is staged and timing for a sale could change the price dramatically.
For example, in the Southland, having a body of water near a detached, 1,850-square-foot, three-bedroom, two-bathroom single-family house built after 2003 raises the value by 41%, according to the National Assn. of Home Builders.
Appraiser Owen evaluated four similar tract homes, ranging in price from $500,000 to $590,200, and found a pool increased the value by $20,000.
Sellers and buyers should consider all the variables. Dave McLaughlin, a real estate agent with Coldwell Banker in Westlake Village, sold one 2,500-square-foot Agoura home for $2.2 million. “So it looked like the price per square foot was about $880. But the home was on 10 acres with privacy and horse property and mountain views,” he explained. “If you put that ... house in one of the tract neighborhoods, it would probably sell for $700,000.”
Although the price per square foot sometimes can be misleading, Rick Hoffman, president of Coldwell Banker Residential in the San Diego, said it often can be a useful reference point. “It could be a base if you are looking at homes in a conforming subdivision and everything is selling at $300 per square foot and somebody is selling at $500 per square foot,” Hoffman said.
For a snapshot of local prices, brokers recommend asking a real estate professional for a comparative market analysis of about 20 homes within a one-mile radius that have closed within the past 45 days.
“Competitive market analysis looks at past sales, condition, amenities, size, market trends and makes a value judgment based on that data,” Hoffman said.
“Comps” can factor in variables -- an ocean view or kitchen remodel -- that online valuation tools such as Zillow, HomeGain, RealEstate.com’s Home Price Check or Domania may miss.
Since the vast majority of home shoppers start their searches online, it behooves consumers to try several valuation tools and compare results.
Zillow spokeswoman Amanda Hoffman, for example, said their evaluations for Los Angeles-area listings are accurate within 10% of the final sale price 66% of the time.
The National Assn. of Home Builders’ house value estimator is among tools that allow users to factor in variables. Its average price for a 2,000-square-foot, four-bedroom, three-bathroom Southland home built after 2000 is $587,597. That value changes to $596,581 if the home is near a park or open area, moves to $622,053 with recreational facilities nearby, hits $660,283 in a gated community, jumps to $705,953 if located near the water and hits $930,453 if the property is on the water.
Place that same $587,597 home within half a block of a factory or industrial building and the price drops to $549,169, lowers to $490,928 with an abandoned building nearby, hits $449,888 if the area is littered with trash and bottoms out at $443,793 if the roads are bad.
Incurable defects, such as being located close to freeway noise or traffic, can depress sales value by more than 10%, said Coldwell Banker’s McLaughlin.
All in all, when it comes to determining the right price for a home, there’s no simple answer.
But for buyers worried about paying more than a home is worth, McLaughlin offers this advice: “Buy a home because you like it, you want to live there, and you’re OK if the market goes up, and you’re OK if the market goes down.”
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Michelle Hofmann can be reached at michellehofmann@earthlink.net.
