How much should you be willing to pay for the smallest house in a neighborhood?  Especially if it is a good bit smaller than all the other houses in the neighborhood?

Let's imagine a neighborhood in Harrisonburg or Rockingham County where homes typically sell for $450K - $500K, with an occasional sale above $500K. All of these homes, however, are 3000 SF homes.  There might be a 2800 SF homes that sells from time to time, but almost all are at, above, or well above 3000 SF.

So -- when a 2300 SF home comes on the market in the neighborhood, how much should you be willing to pay?

A seller might say $440K.  After all, you have to pay $450K+ to buy any house in this amazing neighborhood, so even if my house is smaller than most, you'll need to pay pretty close to that floor of $450K.

A buyer might say $400K.  After all, the 2300 SF home is markedly smaller than just about every other home in the neighborhood, so the sales price should be quite a bit lower as well.  If a 3000 SF home sells for $450K, I don't want to pay more than $400K for a 2300 SF home.

I might say $420K. I think there is merit in both of the perspectives above, and a blending of those two concepts gets us close to what a buyer should be willing to pay. 

Keep in mind -- it is also possible that a buyer will come along who just LOVES the neighborhood and doesn't need much space at all.  This buyer might just be willing to pay closer to that $440K - $450K price, especially if they are a cash buyer, or moving from a more expensive market, etc.