How Can I Tell if the Price Is Fair?

There's an old saying in the software business: Garbage in, garbage out.

It applies beautifully to automated real estate valuations.

An algorithm can process enormous amounts of information in seconds. It can compare recent sales, square footage, bedroom counts, lot sizes, and other measurable characteristics.

That's useful information. But the quality of its conclusion depends on the quality and completeness of the information it receives.

And some of the most important things about a property aren't captured accurately—or at all—in those numbers.

An algorithm doesn't walk through the front door, look around, and think, Something's wrong with this floor plan.

It doesn't stand in the backyard and hear the traffic from the six-lane road behind the house.

And it doesn't necessarily recognize that a seemingly ordinary property has an opportunity hiding in plain sight.

Those things matter. Sometimes enormously.

But there's something even more important that an algorithm can never truly capture: the feel of a property.

You pull up in front of a house and think, Wow.

You walk through the front door and think, Wow, again. I want to see more.

Then you step into the backyard, look around, and realize, I love this place.

There's something about that house. The setting, the proportions, the light, the way the rooms flow, the feeling you get standing there. It all comes together.

You can measure the square footage. You can count the bedrooms. You can calculate the lot size.

But you can't put that feeling into a formula.

Here's an analogy I've used to explain it.

Imagine I show you five photographs of absolutely gorgeous sunsets. Every one of them is beautiful.

But one stands out.

You look at it a little longer. Something about the colors, the composition, the atmosphere, or the way everything comes together makes that sunset more spectacular to you than the other four.

Now try explaining that difference to an algorithm.

All five sunsets are beautiful. But one has something special.

Real estate works the same way.

Two homes can look nearly identical on paper, and both can be attractive, desirable properties. Yet when you experience them in person, one can be substantially more appealing than the other.

That difference can influence what buyers are willing to pay. And it can be one of the most important differences between a good property and an exceptional one.

Something I learned in one of my very first real estate classes, nearly 38 years ago, has stayed with me ever since.

The class was Appraisals.

Our instructor stood in front of the room and asked a deceptively simple question:

"What is a property worth?"

We all took turns trying to answer.

Some answers were short. Others were long, complicated explanations about comparable sales, market conditions, and all the things we thought an appraisal instructor wanted to hear.

A few answers were pretty funny.

Apparently, none was what he was looking for.

Finally, he gave us the answer:

"A property is worth what the market will pay for it."

I loved that line. Still do.

Because after all the calculations, comparisons, adjustments, and theories, the market ultimately comes down to what real buyers are willing and able to pay.

And buyers are people.

They respond to location, quality, condition, practicality, opportunity—and yes, how a property makes them feel.

That doesn't mean every emotional reaction justifies a higher price. It doesn't mean one enthusiastic buyer establishes market value, either.

But when a property consistently creates a stronger reaction than its competition, that appeal can translate into greater demand and a higher selling price.

The numbers help explain the market. The people are the market.

And understanding both is how you begin to understand value.

Imagine two properties.

The first has a quarter-acre lot. Sounds great, doesn't it?

But it's a corner lot, and much of that land is in the front and side yards. The backyard is relatively small, and the property's layout leaves much of the land less useful for the way most buyers want to live.

Now consider another property on a smaller, one-fifth-acre lot.

It's pie-shaped, at the end of a cul-de-sac. The front yard is modest, but the backyard opens into a wonderful, wide outdoor space with room for a pool, entertaining, gardening, or simply enjoying some privacy.

Which lot would you rather own?

Which one will more buyers find desirable?

The algorithm may favor the quarter-acre lot because it's larger.

I would favor the smaller, more usable lot by a considerable margin. In fact, depending on the rest of the property, I might not even recommend showing the corner-lot house to my buyers.

The important question isn't simply how much land comes with the house. It's what you can actually do with it, how it feels, and how desirable that arrangement will be to future buyers.

That's the difference between measuring a property and understanding it.

Here's another one.

Two homes have 2,500 square feet.

One has an excellent floor plan: comfortable room sizes, sensible circulation, good natural light, privacy where you want it, and spaces that work together.

The other has wasted hallways, awkward room placement, poor natural light, and a layout that makes everyday living unnecessarily inconvenient.

Same square footage.

Very different houses.

Some of those problems can be corrected. Others are expensive, complicated, or practically impossible to change.

That's called functional obsolescence—when a property's design or features make it less useful or desirable than competing properties.

And it's one of the things I pay particular attention to.

Because buyers don't live in square footage.

They live in the floor plan.

A property's value doesn't stop at its property lines.

I look at the street, the neighboring homes, the surrounding uses, the traffic patterns, and the overall condition of the neighborhood.

Is the house on a quiet interior street or backing to a busy road?

Are the neighboring properties attractive and well maintained?

Is there something nearby that creates noise, reduces privacy, or limits the property's appeal?

Are there power lines, awkward access, or other characteristics that will discourage buyers when it's time to sell?

Two houses can have almost identical statistics and still deserve very different valuations because of their surroundings.

The market notices these differences, even when a computer model doesn't adequately account for them.

An algorithm may know when a house was built or whether a recent listing describes it as remodeled.

That doesn't mean it understands the quality of the work.

A beautifully photographed renovation can conceal cheap materials, poor workmanship, or expensive problems that weren't addressed.

On the other hand, an older, well-maintained house with dated finishes may have excellent bones, a terrific layout, and an easy path to becoming something special.

I want to know what's been done, what hasn't been done, what needs to be done, and what it will cost.

But I also want to know whether doing that work makes financial sense.

Not every improvement creates an equal increase in value. And not every property deserves the money someone might be tempted to spend on it.

This is where evaluating real estate becomes particularly interesting.

A property's current condition is only part of the story.

Sometimes I can walk into a house and immediately see how a relatively straightforward change could transform its appeal.

Maybe a wall can come out, a kitchen can be reconfigured, an awkward space can become useful, or a property's best feature can finally be brought into focus.

Other times, the apparent opportunity is much less attractive than it first appears.

Moving plumbing, changing floor elevations, relocating major structural elements, or correcting a fundamentally bad layout can turn a promising idea into an expensive mistake.

I've learned to pay attention to how difficult the solution is.

If I have to work unusually hard to figure out how to make a property function properly, there's a good chance the solution will require more money, effort, and risk than the opportunity justifies.

The question isn't just whether a property can be improved. It's whether the improvement creates enough value to be worth doing.

And here's something important: potential value isn't the same as current market value. You still have to account for the cost of improvements, the time involved, the risks, and what the finished property would realistically sell for.

Recognizing an opportunity is valuable.

Knowing when to walk away from one can be even more valuable.

This is something I find myself explaining to buyers all the time.

They've found their home, negotiated a purchase price, had their offer accepted, and opened escrow.

Now they're anxiously waiting for the appraisal to come in.

Why?

Because they think it's going to tell them what their new home is actually worth.

I can't tell you how many times I've had to explain that the appraisal will very likely come in at exactly the accepted contract price.

That surprises people.

What are the odds that an independent appraisal would arrive at precisely the same number that the buyer and seller negotiated?

It's a reasonable question. And the explanation takes a little understanding of what a lender's appraisal is actually designed to accomplish.

The appraisal is primarily for the lender. The lender wants to know whether the property provides sufficient collateral for the money it's lending—and whether the agreed purchase price is supported by the market.

The appraiser reviews comparable sales, evaluates relevant property characteristics, and develops an opinion of market value under professional appraisal standards.

But in a purchase transaction, the appraiser also knows the contract price. That's part of the assignment.

When the market evidence supports that price, it's common for the appraised value to match it.

That doesn't mean the appraiser has independently discovered the one true value of the house. It means the agreed price is supported by the appraisal.

And if the appraisal comes in below the contract price?

Now you may have a substantial hurdle.

Depending on the loan, the lender may calculate its financing using the lower appraised value. The buyer may need additional cash, the parties may have to renegotiate the price, the financing may need to change, or the transaction itself may be at risk. The options also depend on the contract and its contingencies.

That's why the appraisal matters.

But it isn't the same as determining whether a particular property is the right purchase for you, whether it has hidden drawbacks, whether it offers an opportunity another buyer might overlook, or what its actual value is when all those factors are considered.

An appraisal that supports the purchase price doesn't automatically mean you made a great purchase.

And an appraisal below the purchase price doesn't necessarily capture every factor that makes the property valuable to a particular buyer.

The lender's appraisal serves an important purpose. Just don't confuse that purpose with a complete evaluation of the property you're buying.

I begin with the market evidence. Recent comparable sales matter, and I study them carefully.

But I don't stop with the numbers.

I evaluate how the subject property compares with those sales in ways that can materially influence what buyers will actually pay.

The location. The street. The lot's usability. The floor plan. The condition. The quality of improvements. The neighboring properties. The drawbacks that can't easily be fixed.

Then I consider the market itself: what competing properties are available, how buyers are responding, and what the seller's asking price is likely to produce.

Finally, I consider the individual buyer or seller's circumstances and objectives.

A price can be reasonable in the broader market and still be a poor decision for a particular buyer.

Likewise, a seller can have a genuinely valuable property and still undermine the result with an asking price that fails to attract the right buyers.

The objective isn't to find a number that looks convincing on a screen.

It's to understand why a property should command a particular price—and what could cause the market to agree or disagree.