Key Investment Tools: Calculating Average Prices

15th October, 2015
  • In mathematics, an average is a sum of all values added up and then divided by the number of values in the set. An average is used to come up with a mathematical midpoint for all of the values.

    In real estate, those values are the prices of homes or rentals, and average prices represent the mathematical midpoint for the costs of homes or for the cost of rentals.

    For example, to calculate the average value of several homes in a neighbourhood, you would add together their prices.

    $88,000 + $105,000 + $85,000 + $99,000 + $79,000 + $180,000 + $97,000 = $733,000

    $733,000/7 = $104,700 (Approx.)

    However, while an average is a quick and easy to come up with an idea of middle points in regards to home or rental values, they are not the most accurate measurement.

    Outliers – homes that are selling at a much higher or lower prices, or renting for a much higher or lower prices than others in the area – can skew the results of an average.

    With the previous set of numbers, the highest amount - $180,00 – skews the results, so that the result is not fully indicative of the price that one can expect when purchasing a home in the area. The median price of $88,000 more accurately represents what one would expect to pay for a home in the area.

    For this reason, the median price – an actual midpoint of all values in a set – is often used instead. Average prices tend to be used as a rough, simple gauge of values while median prices tend to be more useful in actual calculations of values.

    Any investor is advised to consider the average price as a starting point, but to use more accurate measurements when it comes to determining property values in an area of interest.


    by: Prime Asset Investments

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