Using Price-Per-Square-Foot Analysis to Price a Home

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Listing your home at the right price is critical. Pricing too high or too low can keep your home on the market a lot longer than you’d like, and can even leave thousands of dollars on the table.

Comparing what other similar homes in the neighborhood recently sold for is the more popular way of coming up with an accurate listing price in residential real estate; however, there are other ways to measure value.

One way that some sellers and their agents price homes for the market is by using a price-per-square-foot analysis of a subject property to compare to. While this shouldn’t be the sole method of pricing a listing, it can help somewhat. While many in the industry discard this method, it can still help narrow down an accurate listing price. In fact, professional appraisers and commercial brokers still continue to use these calculations, so there’s still got to be some merit to it.

The key to using a price-per-square-foot analysis is to follow specific guidelines.

How the Price Per Square Foot is Calculated

A home’s price per square foot is determined by dividing the subject property’s price by its square footage. For instance, a 1,500 square-foot-home that’s priced at $300,000 would have a price-per-square-foot calculation of $200 ($300,000 ÷ 1,500 s.f.). Calculating the price of a home can be done by multiplying the price per square foot by the home’s square footage.

Of course, this calculation on its own is very simplistic. Many issues can be raised by this simple calculation alone, as these numbers are subject to error. For instance, how accurate is the actual square footage of the home? How was this actually calculated? Was it even measured to ANSI standards, or was it done using old-school measuring tape?

No matter what method was used to calculate the subject home’s square footage, it needs to be very accurate. Not only that, it needs to be consistent with the method used to measure other comparable homes in the area. If not, one of the variables in the price-per-square-foot calculation could very well be highly inaccurate. Only after very precise numbers are obtained can the price-per-square-foot analysis work.

Follow the 10% Rule

A price-per-square-foot comparison method needs to stick to the 10% rule in order to be accurate. Basically, this rule involves ensuring that the improvements to the subject home along with the square footage of the land it sits on are within a 10% range of those of the subject property that is being evaluated. For instance, for a 1,500-square-foot home on a 5,000-square-foot lot, comparable sales should be based on homes within the 1,350 to 1,650-square-foot range (1,500 +/- 10%), and lot sizes must be within the 4,500 to 5,500-square-foot range range (5,000 +/- 10%).

Lot size considerations are especially important in California where a home’s value is heavily tied to the land compared to the depth of improvements. In this case, not considering usable lot size can result in inaccurate calculations.

Tread Lightly With Improvements

A home that’s been renovated from top to bottom in high-end materials is often assumed to be worth a lot more per square foot than a home that is in dire need of some TLC. While this is true to some degree, improvements might not necessarily have as much of an effect on the price-per-square-foot, depending on the buyer.

For instance, a home with brand new porcelain tiles might not be worth much to a buyer who has intentions of ripping it all out and replacing it with wide-plank oak hardwood flooring. In many circumstances, improvements do – and should – play a role in establishing an accurate price based on a price-per-square-foot analysis, but exceptions to the rule should be accounted for.

Any upgrades that have added useable square footage to a home will typically increase the value of the home. For instance, if a 2-bedroom, 1-bathroom house is converted into a 3-bedroom, 2-bathroom home, such improvements will usually increase the property’s value.

The Bottom Line

The price-per-square-foot analysis can certainly be helpful in coming up with a listing price for your home, but it should definitely not be the only method used. The key to accurate pricing is to use a comparative analysis of similar properties in the area that have sold no further back than two or three months. Actual sale prices are factual, and already involve all of the variables that need to be considered when coming up with an accurate listing price, including size, location, finishes, condition, and so forth.

There’s also something to be said about an in-depth knowledge of the local market, knowing what buyers in the area are looking for, and understanding buyer and seller motivation. The price-per-square-foot analysis only works with a solid understanding of the housing market of the area in question. Experienced real estate agents will be able to pair their knowledge of the market with comparables and a price-per-square-foot analysis to come up with the right price that will garner the most attention from interested buyers.

Selling? These Are Your Disclosure Obligations

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If your home has a specific problem that could affect the enjoyment of the new homeowner or even lower the property’s value, you’ll need to disclose it. If you fail to do this and a major problem arises as a result of that particular issue after the buyer purchases and moves into the home, you could find yourself in legal hot water.

Disclosure statements are important because they allow buyers to better evaluate whether or not to purchase a specific property, or what kind of price they should offer and what type of work will need to be done on a home if they do decide to go through with the transaction.

In the majority of states across the country – including California – you would be breaking the law if you knowingly hide major problems with your home before selling it. In California, sellers need to fill out a disclosure form that specifies every known defect in the home.

In general, all residential sellers with properties containing one to four units in the state of California are required to fill out and submit written disclosures to buyers.

Not only do disclosure statements help provide pertinent information to buyers, they also protect sellers from potential legal action. This statement gives the seller a chance to come clean about any known problems in the home that could have a negative impact on the value or enjoyment of the property.

Types of Disclosures That Must Be Made to Buyers

A number of issues will have to be disclosed to buyers before a real estate transaction closes, including any one of the following:

  • Leaky roof
  • Any ill-functioning appliances
  • Room additions
  • Work done without a permit
  • Damage to any part of the home
  • Presence of mold
  • Termite problems
  • Major construction projects nearby
  • Neighborhood noise issues
  • Whether any deaths occurred in the home in the last three years
  • Information about the location of registered sex offenders that can be obtained from local law enforcement agencies

This list is by no means exhaustive. Your real estate agent can help you identify any particular issues with your home that should be communicated to the buyer.

The state of California provides a standard form, called the “Transfer Disclosure Statement,” which sellers need to use to communicate their disclosures, and can be obtained from a real estate agent. A “Natural Hazard Disclosure Statement” will also have to be filled out, which requires sellers to disclose possible future hazards from fires, floods, earthquakes, and so forth.

Special Form For the Disclosure of Lead

If the home you’re selling was built before 1978, you’ll need to comply with “Title X,” which is officially known as the Residential Lead-Based Paint Hazard Reduction Act of 1992.  In order to be in compliance with this law, you will need to disclose all known information about any lead paint in the home, provide the buyers with a pamphlet called “Protect Your Family from Lead in Your Home” from the EPA, allow the buyers to test the home for lead, and warn the buyer in the contract about the potential presence of lead.

When Do Sellers Need to Provide Disclosure Statements?

While there isn’t a specific deadline of when these disclosures need to be provided to buyers, as long as they are submitted in a timely manner. Some sellers will provide the disclosures before an offer is on the table, while others provide it after an offer is made.

If the disclosures aren’t given to the buyer by the time the purchase agreement is signed by both parties, the buyer can back out of the deal. If the disclosure form is given to the buyer in person, the buyer has three days to cancel the deal. If the form is delivered by mail, the deadline to back out of the deal is five days. At the end of the day, the sooner the disclosure is given, the better.

Consider Getting a Home Inspection Before Selling

The buyer will probably request to have their own home inspection done as part of the contract’s contingencies, so any issues will likely be discovered then. If you strongly suspect that your home has some defects, you might want to consider having your own inspection done on the home before you even list it.

It’s not legally required, but doing so will help you find out if anything in the home will need to be repaired or replaced, as well as help you figure out what needs to be included in the disclosure statement. By making any necessary updates, you might even be able to boost the value of the property and increase the listing price. However, you’re not necessarily obligated to make these improvements. Many times the disclosed issue can be something to be negotiated between you and the buyer.

The Bottom Line

Before you list your home for sale, find out exactly what types of disclosures you’re responsible for. Luckily, your experienced real estate agent will have that information readily available for you so you can cover your tracks when listing and selling your home. Just make sure that the buyer acknowledges having received the disclosure statement by ensuring that they sign and date the form. Full disclosure is the only way to approach your real estate transaction in order to protect yourself, and conduct yourself fairly with the buyer.

Should You Consider Selling if You’re in the Middle of a Hot Seller’s Market?

There are plenty of sizzling hot real estate markets in California. Some are so hot that homeowners could make an absolute killing should they ever choose to sell any time soon.

Take San Francisco, for starters. The median price of detached homes in this bustling city spiked 23% in 2015, while the median condominium price jumped 21%. Homeowners who bought years ago before the market really started to sky-rocket now likely have quite a bit of equity in their properties, predominantly from a rise in market values. Even if homeowners in this area never really had any intentions of selling any time soon, numbers like these could spark some serious contemplation about whether or not to jump in while the market is still red hot.

If you’re mulling over the idea of selling your home during a hot seller’s market – even if your intentions were to stay put – there is plenty to think about before you make that move.

As always, make sure to get advice from a seasoned and experienced real estate agent prior to making this huge decision.

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How Much Higher With the Numbers Rise?

You might be thinking that the numbers couldn’t possibly get any higher, which is why you would even consider selling and capitalizing on a huge gain in the first place. However, the best time to jump out is when the housing market in your area is at its peak.

Homeowners may be tempted to act on a hot seller’s market right away before interest starts to fizzle and the demand isn’t as strong. But it’s best to spend some time taking certain things into consideration, such as determining exactly where the market is continued to head. It’s highly possible that the hot streak could continue, but just how long and how far are the million dollar questions.

Where Will You Buy?

Once you sell, you’ve got to buy somewhere else. Unless you plan on moving to a completely different area where the housing market isn’t as strong, you will likely end up on the opposite end of the transaction, paying huge numbers to stay in the market. Make sure you’re willing and ready to be on the other side of the coin before you jump ship from the home you’re in right now.

The Numbers Aren’t the Only Things to Consider

The idea of selling your home for a lot more than what you paid for it may sound enticing, but lining your pockets shouldn’t be the only thing to consider. A hot seller’s market can cloud homeowners’ judgments, and cause them to forget about the big picture.

Consider where you see yourself in the next few years, and what you need from your home. Homeowners who are starting a family, becoming empty nesters, or retiring sometime soon all need very different things from their homes. If the home you have right now fits exactly what you need right now, it may be worth it to stay put, at least for a little while longer. On the other hand, if your situation will be changing in the near future, now may be a good time to consider the move.

Appraisals Can Come in Short

Your home may be worth a ton of money, but make sure you don’t sell far past what the current market dictates. Why? The buyer’s appraisal could fall short, which means the lender may be unlikely to approve the mortgage amount based on the agreed-upon purchase price. Lenders don’t want to extend a home loan for an amount that wouldn’t be able to be recouped should the buyer default on the mortgage. For that reason, the appraisal needs to come in at or above the purchase price in order to avoid this precarious scenario.

Don’t Rush Your Decision

The last thing you want to do is rush such a monumental decision. Don’t let a hot seller’s market determine how fast you should move into order to potentially seize huge gains. When it comes to real estate transactions, every factor involved needs to be carefully considered. We’re talking about a lot of money here. A hot market isn’t going to fizzle out in a matter of days, so there’s plenty of time to consider every aspect of the situation before coming up with the right answer for you and your family.

The Bottom Line

Knowing that your home is potentially worth double or even triple what you originally paid for it can really get the wheels in your head turning about possibly selling sooner rather than later. But before you make that decision, take the time to meticulously go over the benefits and downsides of such a move. Consider where you want to be today, as well as where you see yourself being a few years from now. A move like this should ideally fit well into both your short-term and long-term plans.

More Single Women Are Buying Real Estate Than Single Men

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Single women are claiming the coveted title of homeowner in higher numbers compared to their single male counterparts, according to the National Association of Realtors (NAR).

Even though the proportion of single female homebuyers declined somewhat after mortgages became harder to obtain because of the housing crisis nearly a decade ago, the pendulum is swinging in their favor yet again.

The percentage of single women who bought homes in 2015 was 15%, compared to 9% for single men. The largest proportion of buyers were married couples, who made up 67% of the home buying market in 2015.

So what’s behind the drive for more single women making real estate purchases compared to single men?

Income

Perhaps the biggest factor behind a larger chunk of the home buying market going to single women than single men is income. Single women are making more money these days. Over the past few years, it’s becoming more and more common for women in big cities like San Francisco and San Diego to earn over $100,000. In the meantime, men aren’t realizing the same rate of wage increases. In fact, the proportion of men who make more than $100,000 dropped in these same two cities, according to a report from Bloomberg.

A boost in income is a key factor because single women traditionally have had to make major sacrifices and stretch their dollar to make a home purchase. Many of them were typically widows or single mothers who simply did not have the financial means to make the purchase sooner rather than later.

However, the average salary for a woman in the U.S. still lags behind a man’s. Women earn 82¢ for each dollar a man makes one year after graduating college or university, according to the American Association of University Women. Yet despite a lower pay, women are more responsible when it comes to handling their credit compared to men, who are 7% more likely to be late on mortgage payments, and have 4.3% more debt than women.

Buying Within Same Price Ranges as Investors

Aside from an increase in wages for many single female homebuyers, the actual price range within which they are buying is often the same as where real estate investors are focusing. Investors who are looking for properties to purchase as a means to rent them out have had a weaker impact in many real estate markets in 2015 compared to the recent past. If the role of these investors continues to dwindle, this could make homeownership more affordable for single women.

Delayed Marriages

Statistically, married couples take the biggest chunk of the homeownership realm, but single women are certainly increasing their piece of the pie. More and more women are putting marriage off until they successfully complete college and get their careers off to a strong start. These days, it’s more common for women to wait until their 30s before getting married. In the meantime, they’re less willing to wait until their marital status changes before becoming homeowners.

In addition, older women who are either widowed or divorced are more likely than men in the same position to make a home purchase. Many of those in the older group may be downsizing or moving to homes that require a lot less maintenance, while the same isn’t as prominent among the older single male demographic. These days, women appear to be more confident to mull over the possibilities of buying a home.

The Bottom Line

A few decades ago, it was uncommon for single women to buy a home on their own. Women could barely even get their own credit card without the signature of a husband or father, let alone get approved for a mortgage before the 1970s. But today, a lot has changed. Not only are more and more single women buying homes on their own, they’re doing so at a rate surpassing single men.

What You Need to Know About Your Earnest Deposit on a Home Purchase

Every home purchase transaction should be initiated with an earnest deposit to the seller. In fact, it’s rare for sellers to accept offers without a deposit. This monetary offering essentially tells the sellers that buyers are serious about purchasing the home, and shows their willingness to meet all of the clauses detailed in the contract.

If the offer is accepted by the seller, the deposit will be put towards the down payment and any closing costs. The money is kept in escrow, and is given back to the buyer if any one of the clauses cannot be met within the allotted time specified in the contract.

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How Much Should Be Put Towards a Deposit?

Many industry experts agree that putting anywhere between 2% to 5% towards the purchase price of a home is acceptable. However, the actual amount depends on how hot the market happens to be in the area. If, for instance, the market is somewhat sluggish, buyers can realistically put down as little as 1%. On the other hand, sizzling markets where homes are flying off the shelf will demand much higher deposit amounts. Many bids have been won as a result of the highest deposit amount.

If buyers plan on putting in a large deposit, the lender may want to verify where these monies are coming from. The deposit can essentially be any dollar figure that the buyer is comfortable offering, and what the seller is willing to accept. In general, the deposit amount should reflect both the purchase price of the home, the state of the current market, and the length of time that has been requested for closing. The more time asked for, the bigger the deposit will usually be.

How Are Deposits Made?

Once the buyer and seller have both signed the purchase agreement, the buyer will provide the deposit either in the form of a money order or certified check, which is then placed in an escrow account held by the real estate brokerage of choice. The check is therefore made out to the brokerage, not the seller.

The money is kept safe in these escrow accounts, as state laws have stringent regulations about how these monies are handled and managed. Under no circumstances are these funds ever to be deposited into the business bank account of a broker.

During the time that these funds are sitting in the escrow account, they generate interest. If the interest amount is over $5,000, the buyer will need to fill out IRS Form W-9 in order to receive the interest. Once the deal is finalized, the deposit is released from the escrow account and applied towards the down payment.

Can the Seller Keep the Deposit if the Deal Falls Through?

If a liquidated damage clause is included in the purchase agreement (which it should), the seller can keep a certain portion of the deposit if certain conditions are met. This clause basically states that if the buyer falls through on the contact, the seller can keep the lesser of the earnest deposit or 3% of the purchase price.

An “earnest deposit” is often confused with “liquidated damages” in a real estate contract.  While the earnest deposit can be any dollar amount, the seller’s liquidated damages clause only allows the seller to keep a certain amount up to a maximum of 3% of the sales price in the state of California.

How Can Buyers Get Their Deposit Back if the Deal Falls Through?

If the deal is not completed for whatever reason, a cancellation fee is typically garnished from the deposit, and the rest stays in escrow. The deposit holder will determine whether or not the buyer will be getting that money back as per the terms of the contract. Ideally, the purchase agreement will detail how a refund should be dealt with.

Typically, if conditions in the contract cannot be met within the allotted time frame, the buyer should be able to get the deposit money back. If however, the clause expiry date comes and goes and the buyer has not fulfilled the promises made, the seller may be able to keep the deposit. 

The Bottom Line

Deposits aren’t just some arbitrary dollar figure thrown out there. These offerings keep buyers on track to fulfill their obligations and promises according to the purchase agreement. Not only do deposits help start the real estate transaction, they also protect the seller should the buyer ever default on the real estate contract.

8 Essential Items Your Home Renovation Contract Should Include

It would be nice to be able to trust your contractor’s word when you’re having work done on your home, but a written contract really is the only way to go. Having everything in writing can ensure that every party involved fully and clearly understands what is expected of them. It keeps the job running smoothly and ensures that everyone agrees on what should be done and when.

A written contract with all pertinent details will also protect you should you ever have to seek compensation for a job that was not done as promised. Be sure that your contract includes all of the following elements before you sign on the dotted line.

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1. Detailed Description of the Job

Before any contract becomes binding, make sure that it lists in detail all of the specific tasks involved in the project, the materials that will be required, and the associated costs with each.

The contract should also specify that the contractor will apply for and obtain all of the required building permits to legally and safely carry out all the tasks, and that all debris from the demolition will be disposed of appropriately. In addition, make sure the contract specifies that all workers involved are covered by liability and workman’s compensation insurance.

2. How Payments Will Be Made

Obviously, the contract should include the total price for the work involved. But it should also detail exactly when increment payments should be made, how much each payment should be, and how you should be paying the contractor. Usually, an initial deposit is required, which should not be any more than 10% of the entire cost of the project.

Then, further installments will be paid after each milestone has been reached, such as after the drywall has been installed, after the flooring has been laid, and after the kitchen cabinets have gone up. The last portion of the final payment should only be provided after the job has been fully completed to your discretion.

3. Start and End Dates of the Project

You’ll both want to know when the job will be started and roughly when it will be completed in order for you to fit it into your schedules. The end date shouldn’t exactly be written in stone to allow for certain unexpected circumstances; however, it shouldn’t be so far off the original completion date, either. Be sure that these dates are written into the contract.

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4. How Changes to the Project Will Be Dealt With

It’s common for home renovation projects to encounter unforeseen situations that can warrant some changes to the original plan. It’s important to anticipate such scenarios, and have a plan in place on how to deal with them.

It should be noted that no changes should take place until the contractor has received written approval from you. Only then should a “change order” take place, which outlines what changes need to be made and any associated costs. 

5. Lien Waivers

Various workers who come onto your property to do work – including plumbers, electricians, drywall tapers, painters, etc – can claim that any work they did on your home was never paid for, even if your contractor did indeed receive payment for the work.

Having a “lien waiver” written into your contract for every installment payment made can protect you from these individuals placing a lien on your property. Every invoice for every payment made should include a signed statement proving that any payments you made to your contractor were in fact used to pay off all the workers involved.   

6. Written Notice of Your Right to Cancel Without Penalty

You may have entered a contract with a contractor to have certain work done on your home, but what if you change your mind at the last minute? What if something comes up that derails your plans for a home renovation?

Luckily, you can back out of your contract without any penalty within three business days of signing it. Having an “escape clause” included in the contact means you can cancel the deal within three days without losing your deposit.

7. Warranty

Having a warranty for all the work done in your home will provide you with reimbursement should something go wrong with the workmanship. Usually, these warranties are for no less than one year. Make sure the name and address of the person or company who will honor the warranty are included in the contract, along with the exact date that the warranty starts and ends. 

8. Signatures

This may sound obvious, but make sure both you and the contractor sign the contract. It won’t be legally binding without these signatures. 

The Bottom Line

Your contact is a crucial element to any home renovation job. It makes sure that each party holds up their ends of the bargain, and protects all parties involved, especially you. Make sure your contact includes all of these elements in order to protect you from any shady behavior from your contractor, and provide you with some recourse should you be defrauded in any way.