I spend a great deal of my time determining the value of real estate. So much so, that sometimes I can’t turn off the valuation tool in my head. Even when I take a “power walk”, I’m clicking off the value of property as I walk by each house.
I can clearly understand the confusion of homebuyers and homesellers and Zillow. I took just a couple of blocks of homes this morning and found these values for “price per square foot” in the mls :
$470, $700, $330, $430, $530, $400, $365, $415, and $660.
Doesn’t seem very likely that homes in the same block would have such a variance in the price per square foot, does it?
I then went to Zillow and hit comparables and found these values for price per square foot of LOT in Zillow:
$67, $87, $243, $24, $49, $15. – a little clue for Zillow there 🙂
Doesn’t seem very likely that one lot is worth $243 per square foot and another nearby is only worth $15 a square foot, does it?
We do know that price per square foot CAN be the great equalizer, and yet no one has developed a tool for valuing property that is remotely reliable in certain neighborhoods.
So how do we in the business value homes? I’m going to write a couple of articles today. This one will focus on the area noted above, which happens to be in a view corrider. You can use this method for valuing any neighborhood with view considerations. First you have to find “the free house”. If you see a house sell, and walk by later and see the house is gone, that house was FREE.
In this example, I found “the free house” and determined the price per square foot of the lot was $130. House sold for $700,000, lot was 5,385 square feet, house was torn down immediately after sale, so the price is the value of the lot.
Now let’s go back and look at the house that sold for “$700 per square foot”. If you go to the tax record, you will see that the property is 50% improved. The tax record of “the free house” shows 4% improved, which we know to be 0%. Now we take the lot of 9,500 square feet and multiply that by $130 per square foot as determined by “the free house”. So now we know the value of the dirt UNDER the house is $1.2 million Now we take the square footage of the house of 3,000 squre feet, we take the sale price of $2 million, we subtract the value of the dirt. The house sold for $800,000 or $265 per square foot and not the mls price of $700 per square foot.
Now you can value all of the property in the aea with better accuracy than the tools at your disposal, that being the MLS and Zillow. All you have to do is take the $130 times the square footage of the lot and $265 per square foot of the house. You do need to adjust the square footage price of the house based on age and condition. A better way to do this would be to keep the value of the lot a constant, and come up with the house per square foot as NEW, as REMODELED and as needs remodel but not a tear down.
I’m about to go on my “power walk”. I’ll pass the house that didn’t sell at $1.4 mil. I’ll click off the lot value at $1 mil. after subtracting from the $130 per square foot of lot for middle of block vs. corner and street frontage vs. depth of lot. The $1.2 has more view frontage and less depth. This lot has more depth and less view frontage. This house has 4,000 sf with 3,000 of it above ground. The other house is 3,000 sf with none of it underground. At $1.3 mil, this house will sell for $75 a square foot vs. the other house which sold for $265 per square foot. Let’s give the basement only $10 per square foot and the rest of the house $100 per square foot and do that again $1 mil for lot + $10,000 for basement + $290,000 for house equals $1.3 million. Offer price should be $1.2 mil and then the buyer and seller can figure out where to agree between the asking price of $1.4 mil and the offer price of $1.2 mil. If they meet in the middle, it will have sold at “fair market value”.
Now look at the house that was 89% improved and lot only 3,900 sf that sold for $1.8 mil. Lot was only worth $500,000. The house sold for almost $450 per square foot. Ooops. Don’t think that was such a great deal, even though the MLS price per square foot of $655 made it look like a better deal than the other at $700. The dirt of the $700 per square foot in MLS being worth $1.2 mil vs. $500,000.
One you remove the value of the lot, and look at these homes as selling for $290,000 vs. $800,000 vs. $1.4 million, you can more readily see if you are getting a bargain, or if you are overpaying for the property as a whole.
GREAT article. This is just a prime example of why you really shouldn’t rely on Zillow for a home estimate – they’ve got plenty of other tools you can use, but I think home valuations should be left to the professionals. It’s the only way for homeowners to get ACCURATE estimates.
That’s why, though they take a lot of crap fromt he real estate community, lead gen services like GetmyHomesValue, HouseValues and HomeGain are the best places to go to get a home value report – they’re done by professionals and are therefore accurate AND if you DO need an agent, you usually get hooked up with one.
It’s interesting to me that not only was Zillow off, but your MLS was as well. I always thought an MLS is always accurate – guess I was mistaken.
Thanks for the info, this cleared some things up for me and gave me some great info to consider!
Interesting. Just figured out the appreciation rate of land vs. improvements for a new house since 2001. The lot value increased by 15% per year, based on current lot values. The structure only improved by 1% to 2%. Supports my theory that the value of NEW deteriorates more than it appreciates. If the house went up by 15% a year, it also came down by 13% to 14% a year.
So an older structure might be worth 15% more over the same period of time, while a new one will be reversing down from “new” to “old”.
This based on an actual “new on market” so we’ll refigure the numbers after the house actually sells. But based on asking price, the value of the structure stayed about the same from the time it was built and the increase in price is actually the increase in the value of the dirt.
I’ll have to find an older home nearby that was bought and sold during the same timeframe, to prove out the increase/decrease in structure. If my client can get the other house for $100 per square foot and bring it up to par with the $265 per square foot houses, without tearing it down (cost $165,000), he can make about $400,000 on the remodel.
But first we’ll look at this new on market where the house value pretty much stayed at 2002 levels and see if it’s worth renovating the other house. By comparing the two, we’ll now know all there is to know about the value of both.
Dear ms loves leads,
The answer can’t be that ONLY the professionals know how to value property. Hopefully by writing posts to consumers regarding how to value property, the general public will start figuring out how to value property using similar methods to those we use.
We were shopping for vacant lots or tear down sites last year looking for a place to build a custom home. Your article got me thinking about how hard it is to value development sites by square footage.
Most sites for zoning reasons have the same capacity to hold one residential unit, and no more, regardless of the square footage. A 5000 square foot lot west of market in kirkland with a teardown house going for 700,000, equals $140/sf for the land. A 5 acre lot in the Avondale area outside Woodinville with a teardown going for $700,000, equals a bit over $3/sf for the land. What a difference! But both are very desirable building sites for the same 4000 sf new house, more or less. The real factor driving both prices in the marketplace is that a buyer like us, or a spec builder, would be willing to pay around $700,000 for a nice lot for that kind of house.
It may make more sense to zero in on a “per residential unit” price average for lots in a given area, then adjust up or down based on size and view and precise location.
Wow, long read but well worth the time Ardell. In our current market i also think you neet to consider market direction. Something none of the automated systems has a clue about. And then there is motivation. It’s a little tough to put that into a calculation.
Really excellent stuff…I will blog this analysis to our community because your post demonstrates not only the complexity of housing, but the value of having a top professional who can decode that complexity.
At My-Currency, we take the opposite approach of AVM’s because we believe that people, as you have demonstrated in your analysis, are STILL smarter than machines 😉 – especially when they work together. Let review the results:
Ardell DellaLoggia TKO, 2nd round, versus AVM’s
Congrats on the victory!
I think Rich as a good point.
I think you need to take the minimum size of a lot and value that square footage higher than any excess square-footage not is nice, but not necessary for construction. For example, if it only takes $5000 sq ft to build, a 7000 sq ft lot shoud be valued something like: 5000sqft($200)+2000sqft($50)
This would be reasonable up until you reach the point where you could subdivide, I would guess.
You also need to take into account the quality of lot. If it’s a steep hill that can only support blackberry bushes, it shouldn’t be valued at flat,sunny prices.
Biliruben,
The “extra” square footage issue wouldn’t apply in the example I used, nor in yours using 5,000 sf vs 7,000 sf. Even though they can have “one house”, the size of house allowed is substantially different for each lot. Given the tightness of neighbors with only 5,000 sf lots, 7,000 would value out at equal lot price per square foot for the additional 2,000 sf and the additional 4,500 sf in my example.
Your example of “extra” lot square footage would apply in a non view area where a lot is 17,000 sf vs 33,000 sf. In fact the 33,000 sf non-subdividable lot could sell for less, it being more maintenance than many want to deal with. “Extra” applies after “more than enough” and 7,000 sf is never “more than enough”.
I of course DID take into consideration the quality of the lot, and used examples that were not only comparable, but very close to one another.
Rich is right about one thing. If ALL you care about is the house and not where it is, by all means go for the $3 PSF lot. But since the appreciation is more in the dirt than in the house itself, don’t expect it to go up in value after it’s built.
Ardell–I am not suggesting the $3/sf lot is a better deal. My point is that the $3/sf lot and the $140/sf lot are “comparables” in a way.
It seems to me that the market for vacant lots or tear downs is driven mostly by spec builders. In areas like Kirkland, or unincorporated rural zoned Woodinville/Redmond (e.g.,Union Hill), it seems like they are all building a 3800sf to 5000sf craftsman house that sells for something like $1.5 million. Given construction costs, that means they can pay some number ($500,000?) for the lot and have the house project pencil. Therefore, the Kirkland lot and the rural lot are in competition with each other fairly head to head as a spec builder site. A home buyer looking in that price range would probably check out both areas.
Obviously the sites are very different, would appeal to different buyers, and would affect the architecture and size somewhat. But you are in both cases looking a reasonably similar new spec home selling around $1.5 million with similar cost structure.
That said, would the house in a rural setting outside Redmond appreciate less than the house in Kirkland? It could be, but I dont think the test for appreciation is per square foot land cost. The average lot size in Houghton is bigger than west of market, so does that mean Houghton will appreciate slower? Again, that may be, but it would be for reasons other than lot cost per sf.
Rich,
We are just not on the same page. The article is about how a consumer should check the value of a house they are buying, in order to determine an offer price. As to the value of the lot improving and not the value of the house itself, I’m just reporting what actually happened at the house I chose in the example, and it says lot up house not up.
I agree that builders deal in averages, which makes it all the more important for consumers to use different valuation methods than the builder/developer, particularly when buying a house. The builder evenly distributed the positives and negatives of all lots and houses based on overall profit. It is then incumbent upon the purchaser of each house to value differently than the builder, as the best house (or condo) in the develpment gets “the deal” when the builder averages the negatives, and the worst one gets hurt on resale.
I remember a condo project with almost no spreads in price for worst location in the building vs best. No difference to “the spec developer” as he was using average and overall profit margins. But on resale the best location seller made a bundle and the worst one can’t sell for what they paid.
Hi Ardell,
I think there’s a spot for you on our test team.
You’re right – once there’s a house on a lot, the $/lot sq. ft. is not very useful information. We only include it in the comps list but even that I battle to explain — so, we’ll be taking it out in a product release later this year.
Thanks for the feedback. Please keep it coming.
David,
Getting it right would have been a LOT better than “taking it out”.
Ardell –>
To your point about picking better comps; absolutely, we’re also working on that and you can expect an upgrade to comps on Zillow later this year.
Thanks again for the feedback.
David
YAY!!! Thanks David. To be fair, at present you are no better or worse than comps provided by Title Companies, which is why I don’t ever even ask for them from Title Companies. Truth be told I’ve seen some pretty poor comp choices from actual appraisers as well.
But if they can tighten the scope and only use Lake View against Lake View and no view against no view, that would be a welcome improvement. We have a lot of water views in Seattle. Lake Washington, Lake Sammamish, Sound Views, Lake Union, Elliot Bay views. Most are noted in public tax records and even have qualifiers for “average” vs. “good” etc…
In any event, we appreciate your continued tweaking and the fact that some people are using Zestimate as offer price is really not your fault. Of course none of it is “David G.’s fault”. 🙂
I’ve been trying to get updates on what’s happening in AZ, but the news seems sketchy at best. Any changes there?
Hi Ardell: can you post your analysis on March-April sales pls as you did before? Thanks!
Sandy,
Absolutely I can do it “as I did before” without modification. I ran the stats and tried to modify them per your subsequent request, but couldn’t do that. But I absolutely can do it exactly as I did before and will right now. Will take awhile to make the pie charts. It will be a mirror image of the original post, but updated timeframe.
Pingback: YES!!!!!!!! The Valuation Tool is Working! | Rain City Guide | A Seattle Real Estate Blog...
HomeGain recently relaunched its free instant home valuation tool that does not require registration.
Indeed, HomeGain pioneered this type of product back in 1999!
What Zillow is doing is not new or innovative.
HomeGain will be updating its relaunched HomeValuation tool again later this week
HomeGain does not claim that its tool is accurate and makes no zillow type claims that HomeGain is the “Kelly’s blue book of Homevaluations”
Check out HomeGain’s Homevaluation tool at http://www.homegain.com
For a blog thread explaining the differences between HomeGain and Zillow see -“Why HomeGain Beats Zillow” at
http://www.futureofrealestatemarketing.com/why-homegain-beats-zillow