What you pay for a home is relative. In the central part of Nairobi, “expensive” is $1,000 for 3 acres, a view and a mule. In Beverly Hills, you can’t find more than a dilapidated shack for less than $3 million. In fact, it’s pretty hard to find anything less than a dilapidated mansion there.

There are two fundamental ways to approach the pricing of a home. One method revolves around what it would cost to build (i.e., the time and materials of contractors who hammer wood, fit plumbing and grout tile). In that formula, the cost of the land and permits is simply added to whatever it takes to build the house. Some realtors refer to this perspective as “replacement cost” value.

The second and most common way to approach the “value” of a house derives from the many people sitting around the table at Thanksgiving: It is all relative.

“I live in a neighborhood of 30 homes, all on a quarter acre, all about 2,600 square feet, all built around the same time.” The last 3 homes sold for somewhere between $750,000 and $850,000. Odds are extremely high that anything you pay in this range is “market.” Those “comps” or comparables are easy.

Where things get more difficult is when people live outside of tract housing and/or McMansions. That idyllic, unique home with the giant mural of cow udders going three stories and into the underwater basement might have been the dream home for the builder (who, it should come as no surprise to you, was udderly crazy), but there may be an illiquid market of buyers, meaning only a few would be willing to pay much for that home, and most buyers would be looking at it only for lot value, believing that they would tear down the house entirely and start over with the individual ranch house of their dreams. Where there would only be normal-sized murals of cow udders.

If you are looking at a house as an investment as well as a nice place to hang your hat, you might want to keep in mind the 3 holy words: location, location, location.

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