Home buyers (and sellers too) here in Silicon Valley like to “see the comps” when trying to determine fair market value or the probable buyer’s value for real estate. Usually that translates into seeing what sold & closed escrow recently and for how much.
In an appreciating market and a strong seller’s market, though, the comps are not so much help as you might hope. They are yesterday’s news! What closed escrow last week was negotiated 30 or 35 days prior, in most cases. By the time a San Jose area home is on record as a newly closed sale, it may already be out of date information. Not only that, but the MLS won’t tell us, at least not in most cases, how many offers there were or details about them – such has how many of them were all cash offers.
I see this mistake a lot in my real estate practice across Santa Clara County. Clients want to view sales around a property they’re interested in. With our terribly severe inventory shortage, there may not be enough recently closed sales – so we look further out in location, futher back in time. If prices are going up fast (as they can do in Cupertino, Palo Alto and elsewhere), the only way you will be in step with the market is if you also factor in the appreciation that has likely taken place since each comparable property has closed escrow, whether that was 2 weeks ago or 3 months ago. And that’s hard to gauge.
What to do, then?
Your best knowledge will come from or be supplemented by information from pending sales; the most recent ones and closest ones are going to be the best, of course. This is where your agent may be of great help to you either from the networking he or she does naturally, from direct experience on sales made or lost, or from proactively reaching out to listing agents to see if they can glean some information.
It also helps if you can spot a trajectory. If homes in your area of interest are going up at the rate of $10,000 per month, when you try to determine the market value, you must jump ahead 30 days to see where it should land, if you think the appreciation will be at all consistent. (Lately there’s been some bouncing around in pricing, but it really depends. If you’re in an entry level price point with good to great schools, values are likely rising.)
Addionally, you will want to factor in the number of offers a property is getting before deciding the price you will offer. It is another very common home buyer mistake to look at the price of sold homes nearby, determine what seems fair, and then plow ahead without considering the level of interest that the house or condo is generating. If there are multiple offers, you can reasonably expect that most of the time (if not all, in today’s market) the sales price will be above the list price. It will be unproductive for you to low-ball (writing an offer more than 5% or 10% under list price). Even if your offer is all cash, remember that sellers want the most possible for their property – they are not going to give you a huge discount on pricing. Some, yes – in my experience usually around 2-3% – but not a huge amount off. They would rather wait a month and get a lot more money!
Factoring in the absorption rate (months, weeks or days of inventory) may be helpful to you also, especially if you cannot get info on the homes which are sale pending. (My Santa Clara County REReport includes this information, btw.)
In summary, don’t just look at the sold comps – they are a backward and incomplete view of what happened when the sale was negotiated. Consider what’s under contract or pending now, and perhaps above all, take into account the current competition for the property you want.