Searching for a great real estate deal requires a seemingly magical combination of ingenuity, luck, and good ole-fashioned math.
The numbers don’t lie.
And if you’re not a math person, they can be daunting.
Let’s break down a simple listing for a residential property, run through the standard sets of numbers and figures that you will encounter, and determine some basic calculations about your personal finances that will help you understand your property price range.
Everything can be assigned to two major categories:
- Property + Market Details
- Financing + Affordability
PROPERTY + MARKET DETAILS
Before getting into anything specifically mathematical that requires calculation, you will first discover some standard facts about the property that, ultimately, will allow you to compare one property to another:
Price - This should be pretty obvious. The price is the amount for which the seller is offering the property.
Square Feet - How big is the finished interior space of the property - the gross living area. Square footage only includes finished interior space (as opposed to an unfinished basement, for example).
Garages are excluded from square footage calculations, as are (frequently, but not always) completed areas below-grade. Take note of basement space if it’s mentioned in the listing. Rooms with dormers can affect the listed square footage as well.
Staircases are included in square footage! So in condo-living, staircases within your entryway factor into the overall unit price and taxes, while staircases in the common living area will not be counted toward the unit price. 15 steps of about 3 square feet each will add 45 square feet into the gross living area. At $750/square foot (average rate in our neighborhood - South Boston, MA), that’s an extra $33,750 in the asking price.
Always compare the listing with the condo documents or what is on record with the town assessor’s records. And obviously, it’s a good idea to walk the property to see if it passes the sniff test for the listed square footage.
Lot Size - How many acres are part of the parcel on which the property is located? Did you know that 1 Acre = 43,560 Square Feet? Now, you do!
Taxable Value - You might see assessed values separately for the Land and any Improvements (or Additions) to the land because some jurisdictions levy different tax rates for land and buildings.
So far, so good, right? Numbers. Lots of numbers.
Now it’s time for some math, which will help you make some logical conclusions!
Price Per Square Foot - Price divided by finished square footage.
Median Sale Price - What is the midpoint sale in a set of sold properties within your neighborhood over recent months? This should help you understand where a property falls in relation to a neighborhood’s, city’s, or county’s average recent sale because half of the properties will be above this median price, and half will be below it. Check to see if you can discover data that tracks this metric over time, which will indicate if properties are generally rising or falling.
Median Price Per Square Foot - Another good barometer to see where a property compares to others within a similar geography. Keep in mind that smaller properties tend to have higher prices per square foot, so it’s best to compare like-kind and like-sized properties when using Median Price Per Square Foot for analysis.
Median Sale / List will help you understand at what prices properties are selling in relation to their listing prices. In hot markets, this will often be over 100% (a $500,000 median list price with a 102% Median Sale / List, for example, means the median property sold for $510,000). When you see a Median Sale / List below 100%, you might want to consider this when writing up an offer for a property. That same $500,000 property in a market with a Median Sale / List of 97% could sell for $485,000 (so a shrewd negotiator might start around $465k or $470k with a first offer).
Haven’t lost you yet, have we? No derivatives and surface integrals yet, so hopefully we’re good.
FINANCING + AFFORDABILITY
Your Payment will be the sum total of a few things:
Principal - How much you’re borrowing.
Interest - The charge for borrowing the principal balance.
Property Taxes - Pretty unavoidable, unless you would prefer to rent!
Homeowner’s Association Fees (if applicable) - If you’re living in a condominium or association of properties (such as within a gated or private community), you will likely have common expenses paid on behalf of all property owners contributing into that account. HOA fees might go toward paying a condo building’s master insurance policy, water bill, snow removal, and other expenses that benefit multiple property owners. When offering on a property, it is best to check an HOA’s finances to learn how much reserve exists in the account, and see if any major purchases have been made lately.
Private Mortgage Insurance (PMI) is applicable if you’re putting less than 20% down on the property, such as with a 3.5% FHA Loan.
To be safe, you should also factor Homeowner’s Insurance into your calculation, which is both mandatory for the conditions of your mortgage and highly encouraged for your own peace of mind.
Often, online listings will include quick payment calculators that allow you to plug numbers into different fields and help you understand if you can afford a property.
But before assuming that you know how much a bank will lend you, there are two calculations that a bank’s underwriters will use to determine whether or not you qualify for a certain level of financing, and how much a bank will lend for a certain property by taking into account the appraised value of the property. This information will not be within a real estate listing, but you should be aware of these calculations.
Debt-To-Income Ratio helps you understand how much of a monthly mortgage payment you can afford when considering your other debt.
Here is a great Debt-To-Income online calculator that you can use to determine how much money you could responsibly borrow.
Essentially, banks will look for your Housing Calculation to be below 36% of your gross income (before taxes and withholdings), and your Total Debt Calculation to be below 43% (when factoring in your car payment, child support, student loans, credit card payments, and payments on any other debt that you’re holding).
Let’s say that you earn $100,000 annually. 36% of that is $36,000. Divide that by 12, and your Housing Calculation would be $3,000 per month.
43% of that $100,000 is $43,000. Divided by 12, and your maximum Total Debt Calculation would be $3,583 per month.
Great! Sounds like you can afford plenty of mortgage.
But wait...you also have a $500 car payment, $300 student loan payment, and a minimum $350 credit card payment. That’s another $1,150 per month right there.
Technically, a lender will reduce this $1,150 from the Total Debt Calculation of $3,583, and arrive at a maximum of $2,433 left for housing. And remember - that’s the all-in figure, which includes principal, interest, taxes, HOA fees, PMI if needed, and your homeowner’s insurance.
Knowing how much of a mortgage for which you could qualify will help you refine your search to include appropriate properties. Why fall in love with a home that is out of your range? Know your numbers up front!
There is one final calculation that you will encounter later in the process once you are under agreement. Loan-To-Value becomes a factor when a buyer and seller come to an agreement on price, but the appraised value of a property does not support this agreed-upon figure.
Without a lender, a discrepancy between the price under agreement and the appraised value does not matter. If you’re a cash buyer and you’re overpaying for a property, well that’s for you to decide if you wish to proceed with the transaction.
But if there’s a bank involved, the lender will want to make sure that their capital contribution is safe by having an appraiser independently report back a price opinion.
If a borrower wants to buy a house for $220,000 and puts $44,000 down (20% - which will not require PMI), the bank will have to lend $176,000. LTV would be the loan amount ($176,000) divided by the purchase price ($220,000), or 88%.
LOTS OF NUMBERS. WOW.
True, but if you break everything down into pieces, all of these numbers are manageable.
First, figure out how much home you can afford. A simple way to do this is through Pre-Qualification with a lender, who will have you complete an application that asks for all of your basic financial information and crunch the numbers.
Once you know how much money a bank will lend to you, then you can pour through individual listing information, check market trends, and find the right property that is within your price range. Your Pre-Qualification amount won’t change for the term of their offer (usually 30-45 days), so the rest of the numbers are simply what you’re seeing within each listing.
The real estate market is booming in Massachusetts, and NextHome Titletown is here to help you take advantage of it. Whether you’re buying, selling, or investing, we can help - we’re great at math! Please contact us today at NextHome Titletown - 617.657.9811 or email@example.com.