When trying to determine the true value of a home, there are two main methods used by professionals:
1. Comparable sales – This is the most commonly used method to determine property value. Comparable sales (comps) include characteristics as similar to the one you’re pricing as you can find. These include: lot size, square footage, home style, age, location. Heads up; an older three bedroom brick one story may not be comparable with a new three bedroom two story, even if they are on the same street.
When possible, use only houses that have sold within the past six months. The more recent the sale date the better. Use houses in the same, similar, or nearby neighborhoods. Stay as close as possible to the house you’re comping. The more similar the houses you’re comparing, the better. Try to use houses built within five years and within about 300 square feet of the size of the house you chose. It’s also best to use similar ages, style and lot sizes.
2. Cost per square foot – This is the second most commonly used method to determine property value. Cost per square foot will help you compare properties that are less similar and properties being sold at different prices. To calculate the cost per square foot, divide the sale price of the house by the number of square feet:
Price / Square Feet
Example: If the asking price is $100,000 and it has 1200 square feet, divide $100,000 by 1200. The answer is 83.33 meaning that the cost of that house per square foot is $83.33. Use your current house for practice. Take the market value of your house and divide that number by the number of square feet in your house. How much is your house per square foot?
There are three main factors to consider when comping properties. Of course, many factors come into play when you’re comping but the three key factors are location, size (square footage), and the number of bedrooms and bathrooms. Many more details are considered by professional appraisers to get a “true” value, but these three factors are easy to use, easy to find and will give you a good idea of the value of the property you’re researching.
Location – You may have heard the old adage that, in real estate, the main three things to consider when buying are location, location and location! Yes, location is extremely important when you’re comparing properties. Where possible, consider only homes in the same neighborhood or within a one quarter to one half mile radius.
Size – Appraisers prefer to use homes with no more than twenty percent more or less in square footage than the target property. So, when comping a property that has 1000 square feet, look at similar homes that are 800 – 1200 square feet in size. The closer in size, of course, the better. The range is to be used if you can’t find something of similar size to compare. If you can’t find a similar size, use the cost per square foot method.
Bedrooms & bathrooms – The number of bathrooms and bedrooms is extremely important. A three-bedroom home with 1200 square feet might be worth more than a two-bedroom home with 1300 square feet. It also matters where the bedrooms and bathrooms are located. For example, the main floor is best, the basement is not so good. At least one bedroom on the main level is highly desirable.
Three-bedroom homes are generally more valued than two-bedroom homes because more families and even couples want the extra space. Likewise, two bathrooms is a big plus over one bathroom.
You get the idea. The more similarities, the easier to comp your property. It’s very often difficult to find like kind comparisons. When your comps vary significantly from your subject property they’re not really comps! You’ll need to adjust your numbers accordingly and this takes some experience and training. If it was easy, we wouldn’t need agents or appraisers!
Please leave your questions or comments about determining a property’s true value.