How to Determine if a House is Worth Buying

Last Updated on May 28, 2024 by SampleBoard

Buying a house is never an easy task, as it’s a decision that can bring consequences for decades. It’s no secret that acquiring a property is a form of investment, regardless of whether you plan to use it as your home or not.

Investment decisions can be particularly challenging during volatile times and, according to Forbes, in 2023, mortgage rates reached a high of 7.79%.

So, how can you tell if a house is worth your money or not, especially in an always-changing environment?

Let’s take a look at some of the most common strategies to estimate a property’s long-term potential.

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Research the neighborhood

The value of a property will be significantly influenced by its location and developments taking place near it. The subjective rating of a location may change over time.

Development plans such as adding new schools or shopping centers could boost a property’s value over time. Negative changes or even a lack of future infrastructure prospects could have the opposite effect. 

Besides infrastructure, other aspects to consider are the presence of environmental risk factors (e.g., if the property is in a flood zone), crime rates, and the perceived quality of the school district.

As a general rule, neighborhoods with low crime rates and well-ranked schools will have more expensive properties compared to neighborhoods that rank poorly in these categories.

Compare the house with other similar properties

This is arguably one of the most intuitive strategies for assessing value. After looking at the sale prices of homes that are similar in size, location, and condition, you’ll get a good appreciation of whether a house is overpriced or underpriced.

Of course, doing meaningful comparisons is not always easy, as properties can vary on some important metrics (e.g., number of bedrooms), and the market prices can vary significantly during rapidly declining or rising markets.

Regardless of the conditions, sale prices are often much better estimators than listing prices, which may or may not be realistic.

Use home value estimators

One way to determine how much a house is worth is by using home value estimators, which can be found on several websites.

These estimators are typically offered by real estate sites or lenders and are based on mathematical models that take into account public records such as property transfers, tax assessments, and several other factors.

It’s important to note that these estimators don’t consider whether a property is in good condition or not, which is an important factor in valuation.

One estimator tool you can use is the FHFA house price index calculator, which provides estimates based on millions of mortgage transactions gathered since the 1970s.

While this tool is quite useful, it should only be used in combination with other strategies, especially since it’s not adjusted seasonally or for inflation.

Reverse search the address

A people search website is another valuable resource for telling you exactly how much a property is worth.

On Nuwber, you can find useful information about both the house and the neighborhood it is located in, including who lives there, when the houses were built, and if there are any sex offenders in the area.

Nuwber also provides details about a property’s current and previous residents, the year it was built, and its home owner probability model, among other things.

Learn how to apply the one-percent rule

If you’re planning to rent a home, you may want to make use of the one-percent rule. This rule allows you to screen which properties are worth a closer look and which ones are not in situations where renting is an actual option.

This rule says that a property should be rented out for at least one percent of its total upfront cost. In other words, if a property costs $100,000, it should be rented for a minimum of $1,000 per month.

On the other hand, if the property's rental income is considerably below the one-percent threshold, this could be an indicator that the investment may not generate sufficient income.

If and when applying this rule, you want to take into account the property’s upfront costs, that is, the house’s purchase price, closing costs, and repair costs.

For example, let’s assume that a property has a total upfront cost of $216,000, where $200,000 is the purchase price, $6,000 is the closing costs, and $10,000 is the repair costs.

In this case, applying the one-percent rule gives us a monthly rental income of $2,160.

Consider hiring an expert

If you have limited experience in real estate, it’s quite likely that you will have more difficulties estimating the worth of a building compared to an expert. Asking an expert for help comes with additional costs, yet the additional investment can pay off.

Real estate professionals take into consideration several variables that indicate value, such as the property’s location, features, and the price of comparable properties, among others.

In other words, the expert will try to appreciate the value of a home by using strategies similar to the ones that you can use.

However, the difference between you and an expert is that the latter will typically have more knowledge and experience to make better use of the available data.

Bottom line

Deciding on whether to buy a particular house or not can be quite a stressful experience. On one hand, a new property can mean moving to a new home or having a new source of income.

On the other hand, it can also mean additional costs which may or may not pay off.

The real estate market is sometimes volatile and complex, which puts those without experience at risk of paying more than they should.

Fortunately, the Internet has brought buyers with access to useful real estate information that was previously only in the hands of a few.

That being said, hiring a professional appraiser is still a better option in many cases, perhaps even more so when you want to use the property to generate income. 

One thing is clear – value can be measured both objectively and subjectively. As such, always think twice before giving up on the house of your dreams.