The
big three...
While many factors come into play
when you're evaluating a residential property's value by "comps"
(comparable sales), the three key factors are location, size (square footage)
of the home, and the number of bedrooms and bathrooms.
Obviously, you'll need to look at many other aspects before you can pinpoint
the exact value of a property, but these are the "big three." You
should be able to look at comparable sales involving properties with these
three factors and get a good idea of the value of the property you're
selling.
1.
Location
Location is extremely
important when you're comparing sold properties. A professional appraiser
typically looks at houses within a one-mile radius or less, and so should
you. In the case of a subdivision, where the houses are all similar and built
in the same time period, you need to compare similar houses with similar
styles in the same subdivision to get an accurate valuation.
If there's a wide mix of properties in the subdivision, you may need to go
outside of it to get comparable sales. Just be careful with "dividing
lines." Geographic lines such as opposite sides of the river, the park,
or a main highway can be invisible dividing lines that put the property in
another school district and may not garner equitable comps.
2.
Size
When determining a home's value,
be sure to evaluate the square footage. Note that appraisers typically look
at homes that are within 20% up or down in square footage as comparables.
Generally (especially within a subdivision), most homes fall within a fairly
limited size range. Therefore, you should be able to develop a good gauge for
the selling price of homes in those particular sizes.
Of course, not all square footage is created equal. Most people think that if
a house has 1,000 square feet and is worth $100,000, then the 1,100
square-foot house next door would be worth $110,000. Wrong! The extra 10% in
square footage equals only a few percentage points in value. If these two
houses offer the same location, style, and number of bedrooms and baths, the
10% additional square footage won't change the valuation much.
Why? Because there is a fixed cost on a house based on the value of the land,
cost of construction, sewer, subdivision plans, and other factors. An extra
few hundred feet of space involves very little cost--only wood, nails,
carpet, and possibly some minor electrical and plumbing costs.
3.
Bedrooms & bathrooms
The number of bathrooms and
bedrooms is more relevant than simply the raw square footage. In other words,
a three-bedroom home with 1,200 square feet might be worth more than a
two-bedroom home with 1,250 square feet. It also matters where the bedrooms
and bathrooms are located--on the main floor or the basement.
While finished basements can add value, the amount of that value is less than
it is for above-ground living areas. Plus, this greatly varies depending on
different regions of the country. In humid areas, below-ground living space
isn't as valuable to homeowners as in dryer areas of the country.
To determine a home's value using comps, also look at the quality and number
of bedrooms and bathrooms. Three-bedroom homes are generally a big plus over
two-bedroom homes, but four or five-bedroom homes don't add as much over a
three-bedroom if they are roughly the same size in square footage. Likewise,
two bathrooms is a big plus over one bathroom, but three or more don't add as
much value.
When comparing bathrooms, make sure you understand the different types of
bathrooms and compare them correctly. A full bathroom includes a shower,
bath, toilet, and sink. A three-quarter bath has a shower but no tub, plus a
toilet and sink. A half bath has a toilet and sink but no tub or shower.
A three-quarter or full-bath create roughly the same value, particularly if
another bathroom in the house has a tub. A half-bath has less value unless
there are enough other bathrooms in the house. Also, a five-piece bath
(separate shower and tub) generally wouldn't add more value than a regular
full bathroom with a combination shower and tub.
There are other factors to consider that affect the value of a home, but
generally you'd give these less weight than the location, size, and number of
bedrooms and bathrooms. Some houses have one-car or two-car garages, some
have carports, and others have neither. The garage factors in some value,
depending on the rest of the neighborhood.
For example, if the neighborhood comps all have two-car garages, this can
affect value as much as 10% on the subject property if it only has a one-car
garage or no garage. However, if the houses are all small and there's a mix
of garage options, the garage won't be as big of an issue. Likewise, a
four-car garage in a three-car-garage-neighborhood probably won't count for
much either.
One exception is with condominium developments. Parking spots or garages are
generally sold with condominiums and can have substantial value, particularly
in large cities where parking is limited to the street.
In addition to looking at properties sold in your target area, you need to
look at properties that are for sale. While asking prices are not sold
prices, it will give you an idea where your local market is heading--up or
down. Also, keep in mind that if your strategy is to flip the property, the
properties for sale are your direct competition and thus the asking prices
are very relevant.
For example, if you find properties that have sold for $150,000, but the
current inventory on the market is prices at $140,000, the asking prices of
your competition become just as relevant, if not more, as the sold prices of
other homes.
If you regularly invest in the same neighborhood, take some time to build
yourself a "due diligence" notebook of properties that have sold,
are under contract, and are for sale within your area.
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