What is Price adjustment? How does it work?

What is price adjustment?

Price adjustment is the price modification process performed when a real estate agent or an appraiser is estimating the value of a property. This process is one of many steps taken during the comparative market analysis and comparable properties are used. Comparable homes are nothing other than similar homes that were recently sold in the same location.

>>MORE: Comparative Market Analysis (CMA)

Example of price adjustment

Let’s assume that you are in the process of selling your 2B2B house. Unfortunately, you don’t know the price at which you should sell it for. So, your agent decides to perform a comparative market analysis. In this process, the agent looked in the neighborhood and find another 2B2B house that was sold for $175,000.

Both houses are in good shape and were built almost at the same time. Their square feet are almost the same. Since these houses are similar, you would expect your own house to sell for that amount or close to it.

But what if you recently spent $20,000 to renovate the kitchen and another $8,000 on flooring?

This is where the price adjustment comes in. If you did not do these two renovations, your house could be valued at $175,000. In order to come to the appropriate value of your house, we are going to adjust the price of our nearby house by adding the cost of renovations to its value. The total renovation cost is $28,000 ($20,000+$8,000).

The new value of our nearby house will jump to $203,000 ($175,000+$28,000). In other words, the house you want to sell will have the same value as the updated version of your nearby house which is $203,000.

>>MORE: Comparables: What Is The Meaning Of Comparables?

Why is the price adjustment important?

The main purpose of the price adjustment is to find the most accurate value of a home that is going to be listed or sold or bought. Without doing price adjustment, the seller could put the property on the market for much higher than its value. This will lead to no offer for a very long time.

On the other hand, the seller could put the house on the market for a much lower value. This will lead to getting less money on the house. What if the renovations we saw in our example were conducted on the house that was sold? In this case, your house would be overvalued if you list it for $175,000.

In other words, the true value of your house would become $147,000 ($175,000-$28,000).

More learning resources

• Intrinsic Value: What Is The Intrinsic Value?
• Fair Market Value(FMV)
• Market Value/Open Market Valuation
• Property Tax Assessment & Assessed Value
• PITI: What Is The Meaning Of PITI?