My neighbor's home just sold, what does that mean for my home's value?

I met with a new seller recently and as we were discussing price, they excitedly exclaimed: “The house across the street just sold for $750,000! Does that mean mine is worth that much too?” Maybe. A nearby sale can absolutely help us understand your home’s value. But just because a house is in your neighborhood, or even right next door, that doesn’t necessarily make it the best comparable sale. Or even a relevant comparable sale. 

In fact, when someone points out an especially high sale price, one of the first things I often discover is that the neighboring home is quite a different than theirs. Differences matter. With this seller, the house was about 30% larger in square footage, was a down-to-the-studs remodel, and it sold over a year ago. Three strikes there. Not a comparable sale.

Does my neighbor’s sale price affect my home’s value? Yes, a nearby sale can be an important indicator of your home’s value, but only if the property is reasonably comparable to yours. When determining a potential value for a home, I look at comparable sales, or “comps.” Ideally, these are nearby homes that are similar in square footage, lot size, age, condition, number of bedrooms and bathroom, and overall features. Your neighbor’s house may be a terrific comp. Or it may require substantial adjustments before it tells us much about your home. 

Or it may be so dissimilar to yours that it really is not a relevant datapoint. 

Why isn't my home worth the same as my neighbor's? Imagine your home is 1,600sf and the house around the corner just sold for $750,000. That's exciting, until we discover that the other home is 2,200sf. That extra 600sf has value -- lots of it, and not just in a price per square foot way, but that space usually translates into more bedrooms, larger or more living spaces, and when a home is *that* much larger than yours it probably is not a comparable sale that an appraiser would use to value your home. The same is true of other significant features. Perhaps the neighboring property has a beautiful built-in swimming pool, while yours does not. In Sacramento's climate, a pool can be a highly desirable feature for many buyers, so an appropriate adjustment may need to be made when comparing the two properties. Other differences matter, too. One home may have a three-car garage instead of two, a remodeled kitchen, owned solar, a larger lot, or an ADU. One might back to a busy street while the other sits on a quiet cul-de-sac. All of these factors can influence what buyers are willing to pay.

What makes a home a good comparable sale? There isn't one magic formula. I generally look at location, square footage, bedroom and bathroom count, lot size, condition, improvements, amenities and how recently the property sold. I also look at the circumstances surrounding the sale. A house that sold $50,000 over the listing price might sound like great news for the neighborhood. But perhaps it was intentionally priced low to generate multiple offers. On the other side of the coin, a home that sold below its original asking price doesn't necessarily mean values are falling, and instead it may have started out overpriced. Or perhaps it had some other issue, like it was occupied by tenants in a long-term lease with under-market rent, or it had structural issues. The final sales price is important, but so is understanding the story behind it. When I am valuing a property, I often will do other data gathering by calling the listing agents to understand the circumstances with the transaction that are not evident from the closed out MLS listing or public record.

What about online or AI home-value estimates? Online or AI estimates can be useful data points, but an algorithm hasn't walked through your house. It may know that two homes have similar square footage, but it may not fully appreciate the difference between a beautifully remodeled home and one that hasn't been updated in decades. It also may not understand why buyers prefer one particular street, lot or floor plan over another. While this is interesting information to look at, I would not put much stock in this.

So, how do I determine what my Sacramento-area home is worth? The best approach is to evaluate multiple recent comparable sales, make price adjustments for differences in property characteristics, look at current competition and consider what buyers are doing in today's market. Your neighbor's sale is certainly part of that conversation. But the highest sale in the neighborhood isn't automatically the best comp or even a relevant comp for your house. An appraiser is going to use 3 primary comparable sales, and 3 secondary comparable sales, and possible a few other pending or active listings as well. And all of them are used to determine value.

If you're considering selling a home in Greater Sacramento, I'm happy to take a closer look at the recent sales around you and help put them into context. Sometimes the house next door tells us quite a bit about your home's value. And sometimes the differences between the two homes tell us even more.