How much is that house worth?

Two major tips to help with your home valuation task

If you're thinking about making the jump into homeownership, make sure you take the time to properly prepare yourself. First, submit your financial information to a mortgage broker in order to secure a mortgage pre-approval. Once you know how much money you have to work with, it's time to start targeting potential properties. Are you looking for a two-storey detached home in the suburbs or a modern condo in the city? Either way, it pays for potential homebuyers to have a rough idea of what their target property type is worth. List prices aren't set in stone; in fact, most are over-exaggerated. Before you make an offer, make sure you take the time to perform a home valuation test.

Here are two tried and tested methods of home valuation worth considering:

1. Historical cost

Historical cost is the main factor that appraisers use when valuing a property for a lender. Consider the following: if the house next door just sold for $400,000 and your target house is exactly the same layout, chances are you would assume that it would cost a similar amount? The reality is that home valuation is never that simple. It's unusual that there are enough similarities in two properties to be able to compare them fairly. As such, appraisers review the following adjustments when performing a historical cost analysis:

• Condition

  Remember that house next door? It sold for $400,000 because it had a brand new kitchen and gorgeous master bathroom. Your target home has the same layout, but the kitchen is 10 years old and the master bath was never completely finished. As such, chances are the value of your target home is lower. Kitchens and bathrooms add major value to homes, so make sure to take this into consideration when preparing your offer. A fairer price could be $350,000.

• Time

  When did the house next door sell? Was it during the peak of the market? Have prices dropped since then? Time is an important factor to consider when deciding on the value of a property. If property prices have dropped since the time your neighbour packed up and moved on, your target home is likely worth less than you originally thought.

• Size

  Does your target home have a porch? If so, the value of your potential home could be higher than your neighbour's porchless property. Even though the layout is the same, this additional living space will add to the price of your property.

2. What's on the market right now?

Historical value is a great place to start when looking into property prices, but when all is said and done, it doesn't matter if the neighbour's house sold for $100,000 if everything that's on the market now is valued in the $1 million bracket. As such, you'll need to review historical cost figures with a grain of salt. You'll need to assess these factors alongside everything else that's currently available in the area right now. If everything in a formerly $400,000 neighbourhood is now for sale at $650,000, it's unlikely that you'll be able to negotiate an asking price back down into your range.

The trick to measuring the value of a property lies somewhere in between these two methods. A mix of historical data and on-market availability will provide you with enough information to develop a fair offer.

(Need some help working out the value of potential properties on your wish list? Contact a professional mortgage broker for help crunching the numbers!)