“How do I determine the value of my real estate?” This was a question asked by a Lesson from the Pro’s reader. Most people would ask a Real Estate Professional, and I agree. However if you think about it, since your real estate could be one of your biggest assets so don’t you think you should know what goes into valuing it?
1) What data was used to make this evaluation?
2) How does my property compare to the average in the neighborhood?
3) What are the property’s strong points?
4) What are the improvements that could be made to increase the value, etc..
The Professional Real Estate Investor class teaches you how to create a CMA (Current Market Analysis). In this article we’ll look at the basic elements that will help you perform a CMA on residential property.
If a layperson is asked; “What do you think your property is worth?” The answer I typically hear is, “Well the guy down the street sold his house for $$$, and my property is much nicer, so I’m sure it’s worth twice as much…..” Sound about right?
Valuation of property can be broken down into the tangible and the intangible.
Step One – The Tangible:
What other properties have sold for in the neighborhood, otherwise known as comps. Along with sold properties you also need to consider expired and current listings. Depending on the market, expired and current listings can provide a better picture of current value. Let’s break down sold, expired and current one by one.
Sold: These are properties that have sold and recorded. Depending on the current market conditions these values are anywhere between 30 to 90 days old or older, if you consider the day the property was put on the market compared to the day the property closed.
Expired: These are properties that were listed on the market and that have now been terminated without being sold. These properties are typically considered to be over-priced for the market. Expired listings can help you understand what’s out of the price range for the area and also perhaps qualities that are unappealing to buyers.
Current: What properties are currently listed for and current competition.
We now have comps from three different time frames, how do we narrow that data down? Use these criteria:
- Apples to Apples – find the comp(s) that are most like your subject property, i.e. beds, baths, square footage, lot size
- Proximity – how close is it to your subject property, the closer the better
- Year Built – there is a big difference between a home built in the 1930’s, 1960’s or 2000’s
- Activity – finding the most recent comp(s) whether sold, expired or current, creates a snap shot of NOW
- Style – similar construction type, i.e. hard to compare a Craftsman to a Spanish bungalow.
- Feature differences – pool (in some neighborhoods it can devalue a property. In others it’s considered an amenity), upgrades, quality of windows etc.
- Financing – a property will often sell for a premium if the financing is carried by the seller. This can be deceptive
- Distressed – if the comp is a distressed sale its sold price is most likely lower than market
- Location within the neighborhood – quite street and cul-de-sac are more valuable than a house that backs up to the main street
Step two – The Intangible, things that can’t be judged by data or numbers:
- Make up of the neighbors – for example: are there a lot of young families
- Status of the street or neighborhood
- Curb appeal
- How well the property fits into the neighborhood
- If the property has a lot of natural light
The value in a good CMA is the data and the interpretation (without emotion) of that data for your specific market and property
I love questions. Keep them coming.