How would you find out the answer to that question? Most of you would ask a real estate professional, and I agree. But think about it, your real estate could be one of your biggest assets. Don’t you think you should know what goes into valuing that asset?
Some of the questions you need to ask are:
- What data was used to make this evaluation?
- How does my property compare to the average in the neighborhood?
- What are the property’s strong points?
- 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 a 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 been 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 1930’s, 1960’s or 2000’s
- Activity – finding the most recent comp(s) whether sold, expired or current, creates a snapshot 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, it’s sold price is most likely lower than market
- Location within the neighborhood – quiet street and cul-de-sac locations 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
- Any other factors that are more subjective than measurable
When trying to determine the value of your personal real estate, emotion can often become a factor. What makes your home special and unique to you isn’t what other buyers necessarily will find valuable. That’s why if you are closely involved with the property, it’s great to get a third party’s opinion (i.e. a real estate professional).
The value in a good CMA is the data and the interpretation of that data for your specific market and property.
Data and the integrity of the data is key. That’s why we spend time in class on where to assess the best data.
I love questions. Keep them coming.
– Diana Hill firstname.lastname@example.org