What is real estate value? It isn't what you have into your
house. It isn't what you feel it is worth. It is what the market
will pay. How do you figure out what the market will pay? For
single family homes, the best way is by seeing what similar
homes have sold for.
Figuring replacement cost isn't very useful. It's difficult to
say what land is worth in a city center where none is left for
sale, for example, and tough to gauge depreciation of the home
itself. Valuation from replacement cost is used as a secondary
method, and for unique homes that can't be compared easily with
others. However, the primary method of real estate appraisal
used for homes is a market analysis using comparable sales.
Real Estate Value 101
First find at least three similar homes in the same area that
have sold within the last year, and preferably within the last
six months. You can find this information is in county records
(sometimes online now), or from a real estate agent with access
to the multiple listing service. Make sure you have the basic
sales information: sales price, terms of sale, description of
the property, etc.
Here is how you use this information to find real estate value.
Write down the selling price of your first comparable. Review
the description item by item, adding to the sales price of the
comparable for each thing it doesn't have that your subject home
has, and subtracting for each thing it has that your subject
home doesn't have.
This sounds confusing, but it will make sense once you try it a
couple times. For example, if your subject home has a second
bathroom, and the a comparable doesn't, you add the value of the
bathroom to the sales price of the comparable. If a comparable
home has a blacktop driveway, and the subject home doesn't, you
take the value away. What you are doing is rectifying
differences, to see what the comparable home WOULD have sold for
if it was just like yours. Suppose a comparable sold for
$140,000, with one less bathroom than your subject home, and a
bathroom is worth $15,000 in your area (ask a real estate agent
for help with these figures). You ADD $15,000 for the bathroom
it doesn't have. You subtract, say $4,000, for the paved
driveway it does have, that your home doesn't have. $140,000
plus $15,000, minus $4,000 gives you a comparable sales price of
$151,000.
Do this with all differences between the subject home and each
comparable. Once done, average the three comparable prices. If,
for example, the three comparables now have adjusted sales
prices of $151,000, 162,000, and 149,000, add the three figures
and divide by three. The indicated value of the home is $154,000.
All appraisal is an inexact science. You might only find
comparables sold over a year ago, and have to estimate
appreciation in the area. If a comparable sold with seller
financing, you have to decide how much this affected the price.
Still, for all of it's flaws, for single family homes this is
the most accurate method for finding true real estate value.
About the author:
Steve Gillman has invested in real estate for years. To learn
more, get a free real estate investing course, and see a photo
of a beautiful house he and his wife bought for $17,500, visit
http://www.HousesU
nderFiftyThousand.com
