One of the biggest challenges if you are selling or buying a home is understanding home prices. It’s a complex topic – in fact, it’s a topic that most real estate agents devote their entire lives to. No wonder it’s hard for the average person to understand!

The best indicator of your home’s value is the actual selling price of similar homes on the same block or within a few blocks. By similar homes, we mean those with the same square footage and same number of bedrooms and baths, and comparable amenities.

Using the market data approach, the real estate agent determines the price based on comparable properties, or “comps” as they are called in the real estate biz. It’s important to remember that the “comps” need to be in the same immediate area. An identical house a mile away in the next subdivision may sell for $30,000 more – or less – than your home.

Beware of homeowners who say, “If my house was in Richland Hills, it would be worth $750,000.” Undoubtedly true, but the ess ential point here is that the house is not in Richland Hills. Until someone devises a magical way to teleport houses to a more expensive area, what really matters is what the house is worth right where it is.

Also beware of trying to set your home’s price based on the listing price of nearby houses. I may own a 1-bedroom beachfront condo. Yesterday the identical unit next door to mine sold for $110,000. Today, I listed my unit at $200,000. Does that mean my unit is worth $200,000? No, it doesn’t. Unless I can find a buyer willing to pay that price for my condo, it’s probably worth $110,000.

It is possible to simplify home pricing somewhat. There are basically 3 methods to valuing real estate. They are:

• Income
• Replacement
• Market Data

Income
Investors normally valuate a house or commercial property based on how much income it will produce. They determine the amount of rent a property will command, divided by the purchase price. This is ROI, or return on investment. If you are buying a home to live in, this is not really relevant to your situation.

Replacement
Insurance companies often appraise homes based on what it would cost to build a similar home today. This determines the replacement value. Often, the cost of replacement is more expensive than the cost of purchasing an existing home. After all, the cost of entirely new building products is high.

Market Data
The most reliable index of a house’s true worth is the market data approach. This is the system used by most real estate agents in pricing houses. The home’s price is based on the selling price of similar houses within the same immediate area.

Remember that pricing houses is an inexact science at best. The only true measure of a home’s worth is what someone is willing to pay for it.