What is the “Benchmark Price” in Real Estate? Ask a REALTOR®

What is Meant by “Benchmark Price” in Real Estate? The real estate industry is full of terminology you may not be aware of, one of those being “benchmark price.” You may have heard your Realtor® or another person say this term already but aren’t too sure what it means and how it applies to your next transaction.

Well, let us tell you what the “benchmark price” is in real estate.

The benchmark price is an estimate of how much a certain type of home is worth on the MLS®. It is calculated by the Housing Price Index (HPI), an ongoing record that tracks aggregate sales of similar homes for any given area.

The benchmark price could be for a specific segment i.e. condos, townhomes, detached, an entire community in general, or perhaps a mixture of both type and neighbourhood.

For example, let’s say you’re looking to buy a single-family home in the neighbourhood of Kitchener. Upon browsing the market, you learn the benchmark price for this segment is $850,000.

The Kitchener  Real Estate Board (KREB®) typically reports the benchmark prices for each segment (condos, townhomes, etc.) in its monthly report. While this is handy to get a general feeling of what’s happening in Kitchener's residential market, it may not always be reflective of that segment for specific communities.

Let's say for example that the benchmark price for condos across the city rose last month. However, in neighbourhood  , it may have fallen due to a combination of let's say low sales activity and heightened inventories.

The Kitchener real estate market is highly dynamic; benchmark prices can vary drastically by segment and location. Hence, it is important to consult with an experienced Realtor® who will ensure you’re fully aware of the differences in benchmark prices for specific areas relative to the overall market and how those could affect your deal.

How are Benchmark Prices Calculated?

When benchmark prices are calculated by an organization like the Kitchener Real Estate Board (KREB®), it is typically done in two steps.

Step #1 – Estimation of benchmark price models:

All sales records for a specific type of property in a specific location (detached homes in neighbourhood, for example) are collected and a formula is produced that estimates how the individual features of a home contribute to its market value.

Step #2 – Calculation of the benchmark price:

Once values are given to each of the features of a home, they are then integrated into the formula in the first step to determine the benchmark price.

What are ‘typical’ features used in the benchmark formula?

  • Benchmark prices rely on the ‘typical home’ and its attributes that are common within a given neighbourhood. Some indicators that identify the average home include (but are not limited to):
  • Lot size
  • Square footage (excluding the basement)
  • Number of bedrooms
  • Number of bathrooms
  • Completion date

Typical attributes can be identified using the sales data for a specific property type in a specific location. For example, if a neighbourhood  in Kitchener has homes with mostly three bedrooms and three bathrooms, the features/attributes of the typical home in that area will have the same. For other indicators such as lot size and square footage, the median value is used.

Using the ‘typical’ home to determine benchmark prices is a stable method because it tracks the changes in the “most common” property and excludes both low-end and high-end properties that may be found in a given area.

Similar Terms: Know the Difference

It’s important not to get ‘benchmark price’ confused with other real estate terms. Here are a few similar terms you’ll want to differentiate between:

Average Price -> The average price is calculated by taking the total sales value and dividing it by the number of sales for a given area. The only problem with the average is that homes sold during a certain time frame may all be lower-end or higher-end, and therefore the average price may not properly reflect the “benchmark” of a given community.

Median Price -> The median price is calculated by taking the total number of home sales in a given area over a specified time frame and listing them from low to high. The value found directly in the middle of the lowest and highest sale prices is called the “median.” This isn’t a great figure to rely on because once again, there may have been more low-end homes or high-end homes sold during the specified time frame.

If you’re unsure about certain real estate terms and want to know how they apply to your current/future transaction, ask your Realtor® and they should be happy to help!

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