When it comes time to estimate the fair market value of a home, all that matters is this: “How much are similar homes selling for?“. Why is this all that matters? Because if you’re buying, why would you pay more for Home A when you can buy Home B, which is very similar, for less money? And if you’re selling Home A, why would you price it higher than Home B when you know that buyers will be less likely to pay your higher price when they can buy Home B for a lower price? It just doesn’t make sense.

Even though this is an easy concept to remember, it’s not uncommon for both buyers and sellers to forget it and get side tracked by things that aren’t relevant when they’re in the midst of negotiations. What types of things side track them?

Well, you know a seller is side tracked when he or she says things such as:

-“My home is worth more than Home B because I bought it at the same time that my neighbour bought Home B and I paid $100,000 more.” The buyer’s standard reply: “The amount you paid for your home doesn’t matter to me. I can buy Home B for less.” (Subtext: I don’t care that you overpaid.)

-“My renovations cost $1,000,000”. The buyer’s standard reply: “The amount you paid for your renovations doesn’t matter to me. Home B is similar to your home and it’s listed for $500,000 less.” (Subtext: It’s not my fault that you over renovated or paid your contractor too much.)

-“This is the price I WANT and I won’t take a penny less.” The buyer’s standard reply: “What you WANT doesn’t matter to me. I can buy Home B for less.” (Subtext: Good luck selling your home. I’m going to make an offer on Home B because Seller B is more reasonable.)

Buyers aren’t always saints either. They’ve been known to say things such as:

-“It’s going to cost me $100,000 to renovate your kitchen and bathrooms.” The seller’s standard reply: “My list price already reflects the fact that my kitchen and bathrooms aren’t renovated. What you WANT doesn’t matter to me. This is what similar homes are going for.” (Subtext: You’re not being realistic. If you want to pay less, maybe you should be looking for a smaller home.)

-“This is my best price. I know it’s $50,000 less than your list price, but it’s all I can afford.” The seller’s standard reply: “What you can afford doesn’t matter to me. This is what similar homes are going for. I’ll just wait for a buyer who can afford my home.” (Subtext: Get real. Why are you wasting my time if you can’t afford my home?)

It’s true that some homes will sell for more or less than similar homes, but don’t count on this happening. If you’re buying or selling, you’re best off being realistic and staying focussed on the one thing that really matters: How much are similar homes selling for?