[photopress:bullseye.jpg,thumb,alignright]While “market value” and “appraised value” are not always one in the same, calculating a home’s value is both a science and an art, whether the value is being ascertained by an appraiser or a real estate professional.
The purpose of the valuation can actually have some bearing on the value itself. If you have a client who is purchasing a property to remodel and flip it, the value for that client has to take into consideration the cost of the improvements and the eventual resale value. Consequently, one has to be involved in both knowing, and making recommendations with regard to, which improvements will produce the greatest return, before the client makes an offer on the property.
Just as a lender has to take into consideration many factors when recommending various loan programs, a real estate professional has to take into account many factors before determining a home’s fair market value. When you are representing a seller, you have to lean towards the high end of the value range. An appraiser would call this “highest and best use”. A real estate agent would call that “if purchased by a person of the best buyer profile. For example, someone purchasing a property to live in it, will pay more for a property than a builder who is going to tear it down or an investor who is going to remodel and flip it.
When you represent the buyer, you have to consider the home’s resale value and any money left on the table by the seller. A seller leaves money on the table by various means that are generally not reflected in the asking price itself. I use this test when valuing a property for the buyer: If they called me in a very short period of time to sell it because they decided to move back from where they came from, could I get them out whole, meaning purchase price plus the costs of purchase and sale. By being a “listing agent” in your mind when representing a buyer, an agent will perform a better valuation than if they are just considering how much the buyer wants or likes the property. Of course, the buyer can always choose to pay more than that value and say “I don’t plan to sell it as I plan to live here for a very long time”, but they will at least know how much they are overpaying for the privelege of getting the home. Very important when the buyer is trying to determine the cap on their escalation clause.
Let’s go to the science part of the valuation. Some houses have what are called “true comps”. This would be most true in a very large community of newer homes. I am not going to spend a lot of time on valuing property with “true comps” because here in the Seattle Area, there are very, very few houses that can be valued by those normal methods. In fact the only ones I have been able to value by normal methods have been newer townhomes. Proximity to the subject property is not always relevant, especially in Seattle vs. Eastside. The comps have to be ones built in the same “finish period” and have the same “buyer profile”. For instance, a property built in 1991 may have white cabinets, gray countertops, white appliances and 4″ white tile in the baths. Using that as a comp to a property built in 1995 with granite tile countertops vs. gray laminate and maple cabinets vs. white cabinets, will not produce a reliable end result. Nor would using a comp with granite slab counters, stainless appliances and hardwood floors.
For the most part, we are lucky to find one recent sale that is quite similar to the property we are valuing. I call that the home’s “significant other”. An appraiser will still use three solds, whether similar or not, to ascertain value. A real estate agent will pull the significant other from the solds and move to properties that are pending and STI and ACTIVE in determining what a buyer will pay or should pay or what a seller should set as an asking price.
A few recent examples. When I valued a property for a seller back in May, I had comps of $325,000, $327,000 and $337,000. I priced the townhome at $350,000 and it sold for $350,000. The upward momentum of the marketplace from May was a significant factor. For this particular townhome, best buyer profile was someone who was relocating to the area and the buyer was in fact relocated here for her new job.
When I recently valued a newer townhome at this time of year, I needed to be more “right on target” as we are in a sluggish month of August aka “agents take vacation time month” and running into September which generally has two weeks out of four that are hot. The buyer profile of this particular townhome was a single person who would take in roommates. It did sell quickly and at full price to a student taking in two roommates. The danger on this one was pricing against new construction. You have to be as high as you can without encroaching on the price at which a buyer can get a brand new townhome nearby. I could not use the comps at all when valuing that property, because the subject property was built in 2001 and the comps were 2003 and new. The interior finishes were not comparable and could not compete, so to get a fast full price was their best chance of not having to bargain down to a level below the highest achievable price.
Let’s flip to buyers and how I value a property for a buyer vs. a seller. I’ll have to make this another article as the Vicodin for the root canal is kicking in and I’m going to barf.