Estimating the Market Value of a Property
We are regularly asked how much a property is worth. The simple answer is that a property is worth what an informed buyer is willing and able to pay for it. While true, I never cared much for these types of answers so in this article I will provide an overview of two ways to estimate the market value of a property.
The market value of the property is primarily based on recent comparable sales and the condition of the subject property relative to the sales comps. For example, suppose you wanted to determine the market value of the following property, which I will call the "subject property".
- SqFt: 1499
- Garage: 2
- Lot: 2614
- Beds: 2
- Built: 2000
- Stories: 2
And, suppose you found the following comparable sales through a real estate agent, a real estate website or other means:
The process to determine the market value based on these comps is to:
- Determine the $/SqFt (sale price / SqFt) for each property
- Add the $/SqFt's together
- Divide the result by the number of properties to get the average $/SqFt.
- Multiply the average $/SqFt x the SqFt of the subject property.
So, the calculation of $/SqFt would look like the following:
Sum the $/SqFt's: 149 + 157 + 157 + 143 = 598.
Divide $598 by the number of properties to get the average $/SqFt: $598 / 4 = $149/SqFt.
Multiply the average $/SqFt x subject property SqFt: $149/SqFt x 1499 = $223915 or ~$224,000.
The above is usually valid if the subject property is in an "average" condition of the sales comps. However, life is rarely this simple. In most cases you're going to have few good comps and sometimes no good comps. In this sort of situation, there is another approach you can try.
Suppose there is a (somewhat) similar sales comp but is in better condition than the subject property. And, suppose the comp sold for $200,000. After comparing the subject property and the sales comp you determine that you could bring the subject property to the same condition as the sales comp by the following:
- 100% repaint walls
- Replace the carpet
- Replace two broken windows
- General repair items
I will use the following assumptions for estimating the cost of the above work and on experience and/or quotes from vendors:
- 100% repaint walls: $2,200
- Replace the carpet: $2,800
- Replace two broken windows: $475
- General repair items and pad (to handle the unexpected): $600
The total of the above is $6,075. A few other needed assumptions for this example:
- Assume that the sales comp is 2,000SqFt.
- Assume the subject property is 1,950SqFt.
Using a similar approach as we did before:
- Determine the $/SqFt for the sales comp: $200,000 / 2,000SqFt = $100/SqFt.
- Estimate market value for the subject property based on the sales comp (if it were in the same condition): 1,950SqFT x $100/SqFt = $195,000.
- Subtract the cost to bring the subject property to the condition of the sales comp from the market value: $195,000 - $6,075 = $188,925 or ~$189,000.
The point of the second method is that if you do not have good comps, you can be creative and get there by other means. Also, this is an estimate, not a precise value. And different people will arrive at different values.
Some basic guidelines I suggest on selecting sales comps include:
- SqFt difference: 10%. So if the subject property has 1499SqFt, 10% would mean a SqFt range between 1350SqFt and 1650SqFt.
- Beds: Same number
- Garage: Same number
- Lot size: Depending on the location, a small difference in lot size can have a huge impact on price. In Las Vegas, I try to stay within 20% percent.
- Age: This can be a bit tricky with an updated property. For example, you cannot compare a house built in 1990 with a completely updated kitchen and bathrooms to other homes built in 1990 with no updates. You need to use the photos to determine the best match which is not necessarily the year built.
- Days back: You need to understand the current market. If the market is flat then properties sold within the last six months are probably valid. However, in a rapidly changing market, 2 to 3 months may be the max.
- Relevance: Just because a property has the same square footage and is physically close does not mean it is a good comparison. For example, there's a location in Las Vegas where properties on the north side of the road are running approximately $150/SqFt to $180/SqFt while on the south side of the road similarly sized properties are running between $250/SqFt and $300/SqFt.
- Distance: Obviously, the closer the better. Ideally, a model match within the same subdivision. This does not happen very often so you have to do the best you can.
Calculating the market value of a property is relatively easy, if you have sufficient similar comparable sales. It all falls down when you have insufficient comps or when the properties are not in similar condition. However, with a little creativity, you can still estimate the market value.