As REALTORS®, we get asked, “What’s my (or that) home worth?”
It’s a great question. How DO we value homes? There are some correct ways, and incorrect ways. People accuse REALTORS® of pricing a home just to sell it! If you reacted sympathetically to that statement, re-read it and then think for a minute: REALTORS® just want to price a home to sell it.
YES, THAT’S THE POINT! YOU WANT TO SELL THE HOME, RIGHT?!?!
You want to move, not operate a museum or tourist attraction. Right? You aren’t charging admission. Right? I know that sounds a bit over the top, but the hyperbole is meant to point out some serious issues.
In my prior blogs, I have shared how NOT to price your home. Today, I share how TO value your home.
When a property is valued for lending, it follows one of three methods:
1. Income basis – primarily for investment real estate
2. Cost basis – primarily done for new homes
3. Comparable sales basis – primarily done for resale homes
Given the first two are for a relatively small segment of the market, we’ll bypass those for now and focus on the latter, comparable sales.
Comparable sales is not:
· Just take the homes you like
· Just take the homes like the one you’re looking at
Comparable sales is most competently performed via a method called “paired sales analysis”. Paired sales analysis is a method where one develops a “grid” of properties. One takes a look at homes which have similar physical, functional and location characteristics to the subject property based on an inspection of the subject. In terms of physical size, typically one looks at homes +/-10% – +/-20% of the subject property. Functional characteristics refer to the type/style/use of the home; you would avoid comparing a ranch to a two-story home for example. Location speaks for itself.
Then, when one examines the other homes, one examines:
· Sales prices of recently sold homes (3 to 6 months, depending on appropriate sample sizes)
· Sales conditions (concessions)
· Feature differentials
o Lot size
o Feature differentials (fireplace, number of bedrooms, garage spaces, etc)
From the differences of those, the premiums are determined. The features are adjusted against the grid of properties to determine the price of the subject home.
Some believe that the “paired sales analysis” is an outmoded means of valuation. The logic goes that this method assumes a perfect elasticity in the market (that an ice cream cone is an ice cream cone), and that all homes are perfectly substitutable (that strawberry ice cream is a perfectly suitable substitute for vanilla). And, that’s a good point. How many times have we found ourselves saying, I can’t believe they bought that home with the gaudy [fill in the blank here]?
However, in support of that method is the fact that this is how appraisers – by and large – evaluate resale homes for banks. And unless you are going to family, a loan-shark or paying cash, chances are this is how the value of your listing will be determined.
Permit me to show you an example of this method using a randomly chosen home in Westminster, Colorado.
To review that paired sales analysis now, click the following links (they will be available online until 1/23/2013):