OfflineI wrote last week about finding good comparables. I want to write a little about using the comparables to find the value of the property.
Once you have received “good” comparables you need to find the value so you can determine what your subject property is worth.
To find the value we will assume you have found three “good” comparables. Once you have these comparables one of the most common ways to find the value is to figure the cost per square foot for each of the comparables you have.
Finding the price per square foot is as easy as taking the sales price of the comparable and dividing that by the square footage of the comparable.
- Here is an example: $150,000 sales price / 1600 sqft = $93.75 per sqft.
Once you have the price per square foot for each of the comparables you will find the average. Let’s say that the average price per square foot is $91.18 and let’s assume the subject property we are looking at is 1550 sqft.
Knowing the square footage and price per square foot for the subject property we can times this out to get a market value for the property.
- Here is an example: $91.18 x 1550 sqft = $141,329 market value.
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Important REI math lesson to remember.
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nstreet's explanation is an excellent rule-of-thumb procedure, especially if the comparables are similar in size, age, condition, lot value, and location, both to each other and to the property being appraised. If these features vary very much, however, you should maybe go a little deeper in your analysis.
The sales price is your starting point, so some attempt should be made to confirm the sale, to make sure it represented the market (or did one of Dean's students get one whale of a deal with a low price). Talking to the seller is usually best, as sellers seem to be most willing to give details about any terms that may have influenced the price. The answers may eliminate a sale as an indicator of market value, even though it IS a sale.
Consider that since you are starting with the selling prices, which include the land value, a better lot increases the indicated value per square-foot. A larger size house usually sells for less per square foot than a smaller size, all else being equal. An older one would bring less per square foot, unless remodeling offsets the age. Better condition would obviously make the square foot value higher, as would a better location.
Judgment is required to make these adjustments, but even rough approximations give better results than no adjustments at all. Just think how a buyer might adjust his purchase price for the individual differences, and you will be quite close. Just start with the comparable that is most similar to the subject property and adjust its price up or down so it would represent the price that buyer might have paid for the subject. That answer should be the most accurate value, so give it the most weight. Then use the second most similar sale and do likewise, then the third.
Taking an average of all the indicated values is giving them all equal weight, which may not be the best decision. Frequently an appraiser may conclude that the most comparable sale's indicated value for the subject is his best answer, maybe rounded in the direction indicated by the others.
Logic and judgment should guide whatever method is used for valuation.
cactusbob