How To Value Real Estate

by Mike Holman

Valuation of real estate properties is quite difficult – in fact it can really only be done within a fairly broad range since in my opinion it is just too hard to try to accurately predict the sale price of a house.  The title of this post should have been “How to guess at real estate prices”.  :)

A few years ago I spent a lot of time looking at various houses, taking notes and finding out the eventual sale price.  The reason I did this exercise was partly because I enjoyed going to open houses but also because I knew I was going to be in the market for a new house and I wanted to learn the market better.  My theory regarding house valuation was that if I looked at enough houses and analyzed the different properties and the sale prices – I should be able to gain some sort of expertise and should be able to accurately predict the value of various houses.  My theory was a failure as I couldn’t seem to gain much accuracy for various houses that I tried to predict the sale price.

I was able to learn the local housing market to some degree but if I could guess within 10% of the final price then that seemed to be as good as I could do.  A plus or minus 10% error on a $500k house is not all that useful although I was able to know when sellers set the price below market for a bidding war.  Of course I couldn’t tell what the final price would be.

Look at lots of houses

The best advice that I have for a house hunter is to look at as many houses as they can, take notes (or keep the mls listings) and find out and write down the final sale price.  The purpose of doing this is to learn the local housing market and get a feel for what kind of house will go for various prices.  You might be asking why this is necessary if you have an agent….well…..this post might give you a clue!  I think a good agent who knows the area could be a great resource as far as knowing house valuations but unfortunately not all of them will be forthcoming if they aren’t familiar with your area.  If you have the time, then the best strategy is to learn the local housing market yourself.

This also applies if you are selling your house.  In fact it’s easier to do if you are only looking at houses similar to your own since there probably won’t be that many of them.  This is useful to try to set an asking price and also to counter your agent who will generally have different ideas than you about selling prices.

Land can be a huge factor.

One of the “truisms” of real estate that everyone always says (to me at least) is that detached houses command a premium over semi-detached.  While I can certainly accept this as being true, I’ve always been skeptical that there is much of a premium involved.  After all, other than the fact that a wall is shared, the house can be very similar to a detached.

As a bit of background – in my area there are probably 65% semi-detached houses and 35% detached houses so unlike some areas, there is nothing “unusual” about a semi.   It’s also a very urban setting so land values are quite high.

More background – for any American readers –  what I call “detached” (standalone house having no contact with any other structure) you might call “a house”.   What I call “semi-detached” you probably call “duplex” or “semi-attached”.

Detached/semi-detached was one of the “factors” that I tried to analyze in my great house valuation project.   After looking at quite a few houses, I really couldn’t see any premium for detached.  Part of the problem of course was a difficulty in finding houses that were similar in many respects except for the detached component.  I concluded after a while that the detached premium was probably low enough (<5%) that I couldn’t measure it properly.

It wasn’t until much later that I realized how high the land value was in the areas I was looking at.  Since most of the houses were in reasonably good condition (for old houses) I had assumed that buyers were paying quite a bit for the house along with the land.  As it turns out the buyers were generally paying a huge percentage for the land and a surprisingly small amount for the house.  I figured this out by eventually looking at some houses that were teardowns or complete guts.  Since the house was worth very little in those cases, clearly the buyer was just paying for the land.  In one particular area I looked at – most houses were selling for around $450k.  Much to my surprise, there were a few houses purchased for around $350k, $360k that were torn down which leads me to believe that $450k houses were in fact only $100k houses sitting on $350k pieces of land.

What does this have to do with detached/semi-detached?  Well, given that the land value was such a dominant factor in my local house prices, that meant that any premiums/discounts on the houses themselves are minimized.  Ie if the detached premium is 20% but the house is only worth $100k and the land is worth $350k then a semi-detached equivalent would be worth only $20k less which I wouldn’t be able to measure.

Of course semis are different in that it’s a lot harder to tear down a semi unless you buy both halves so it’s not accurate to say that the land under a semi has the same worth as a similar sized plot under a detached house but I’m assuming it’s close enough.

I have some other main “factors” which I think contribute to house prices which I’ll hopefully share in a future post.

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