Calculations for Valuation
SALES COMPARISON APPROACH
Learning Where to Find Information
When planning to sell your home, coming up with the right price can seem like a very difficult process. There is a lot of data to sift through and you might feel a little lost. With some careful investigation and calculations, however, you can come up with a good estimate of your property’s market value — or the price your house can be expected to bring — without too much trouble. With this information, you can come up with the right price for your house.
Do an internet search for recently-sold homes in your area. Some local governments and realty sites publish this information on their websites. Using an online search engine is a good first step to take before you make any phone calls or visit any offices. That way, you can get an idea of what information is available without a lot of inconvenience for yourself.
- Some of the most popular sites for real estate research areRealtor, Trulia, and Zillow. Start here when searching for information about recent sales or other real estate data for your area. Keep in mind that this information isn’t always 100% accurate, which is why you should gather information from multiple sources.
Contact your local tax assessment office. Local governments keep records of recent property sales, which are usually held in the tax assessment office. Contact the office and ask for records of recent sales in your neighborhood or zip code. See if they can give you a list with all the details of each property, including selling price, date of sale, square footage, year built, and number of bedrooms and bathrooms. You’ll need all of this information to make an educated guess on the market price for your home.
- This data has the advantage in that it is real sales data and is in your local market (real estate value is based on location), but very seldom is a homeexactly like yours sold in the recent past, so some adjustments will need to be made.
Contact a local real estate agent. Realtors will have plenty of experience in your area and be aware of recent sales, even if their office didn’t make the sale. Contact the realty office and see if any agents are willing to talk about recent sales. Remember to get all the necessary information about the sale, including at least the selling price, date of sale, square footage, year built, and number of bedrooms and bathrooms.
- It would probably make the realtor more willing to share information with you if you mention that you’re looking for information because you plan on selling your house. When the realtor sees you as a potential client, he may be more open with you.
- If you do hire a realtor, he should perform a comparative market analysis. This report covers many data points including comparable sales of other properties and estimates of market value.
Ask for a property profile from an insurance company. Insurance companies keep data on real estate sales in a given area. Some will provide you with a property profile for free, hoping you’ll buy insurance from them. The property profile will contain a list of comparable properties to your own, and the specific aspects of these properties.
- Not all companies will do this for free, but you might still be able to obtain a property profile for a fee.
Look in local newspapers. Town, city, and county newspapers often publish information on local property sales. You can scan the real estate section for information on recent sales. Bear in mind that you might not get all of the information you need solely from a newspaper. You’ll probably still have to contact a tax assessor or real estate agent for all of the necessary information.
Putting Information Together
Make a spreadsheet on your computer. You’ll have to organize a lot of information once you get a list of recent sales, and the most efficient way to do this is with a spreadsheet. Make a separate column for all the information about properties, including address, lot size, square footage, home style, year built, garage size, number of bedrooms and bathrooms, condition of the property, and selling price. Start by plugging in your own house’s information, though of course leaving the selling price section blank for now. You’ll then plug in other properties as you asses the list of recent sales you’ve acquired.
- If you’ve never made a spreadsheet before, readMake a Spreadsheet in Excel.
- If you’re unaware of the square footage of your own home, look at your real estate documents like closing papers. It will probably be included somewhere on these papers.
- If you can’t find your home’s square footage, you can get a rough estimate by measuring the outside of the house. In feet, measure the length and width of the house and multiply these two numbers. This will give you a larger number than the actual square footage, because professional appraisals subtract non-liveable space inside like hallways and closets. You could get a more accurate estimate by finding the area (length x width, just like with the outside) of each interior room, excluding the basement. Then add these numbers together.
Look for homes that have sold within the last six months. When you’ve acquired the necessary information about sales, you have to start sorting the properties. Start by rejecting any sales that occurred over six months ago. The real estate market changes quickly, and sales more than six months old could be too outdated to be useful. Only use older sales if you can’t find any data on a more recent sale.
Find at least three homes that are most like yours. After finding the most up to date sales that have occurred in your area, you can start assessing the information to find comparable properties. Remember that you probably won’t find properties exactly like yours. The aim is just to find properties that are most like yours out of the list of sales. Using the following criteria, find comparable properties to get the best idea of what your home will sell for. Then plug them into your spreadsheet to compare them to your own home.
- Lot size.
- Square footage.
- Home style.
- Number of bedrooms and bathrooms. Also include whether these are full bathrooms, with a shower and toilet, or half, with just a toilet.
- Whether or not there is a finished basement.
Adjust the sales price if necessary. This is where a good deal of estimation comes in. Since it’s unlikely that all of the homes you’ll put on your list will be identical to yours, you’ll have to make them fit yours and then adjust the sales price accordingly. Adjusting the market price is a difficult process. It would help if you consulted a realtor or someone else who is experienced in the real estate market. She will know the value of certain specifications for properties.
- For example, say you find a house that is exactly like yours that sold for $200,000, except it has two bathrooms and yours has one. Try to estimate what it would have sold for without that extra bathroom. A bathroom can add over $10,000 to the market price. You therefore estimate that the home would have sold for $190,000 if it had the exact specifications of your house.
- A realtor will be able to provide the comparative market analysis and has experience in making the estimates and adjustments based on differences. Make sure that you consult an experienced realtor with a large number of sales in your market.
Use the adjusted sales prices of comparable prices to estimate your home’s market value. Once you’ve adjusted the sales price of comparable homes, you should be able to make an educated guess on your home’s market price. For example, if you chose 4 homes and they had sales prices of $240,000, $248,000, $255,000, and $257,000, you can make a good estimate that your house will sell somewhere between $240,000 and $257,000.
- When coming up with adjusted sales prices, only use the final selling price of a home. The asking price of a home doesn’t tell you anything; sellers can ask anything they want, but it doesn’t mean they’ll get it. Use only prices that houses actually sold for. This will tell you the market value of the area you live in.
Increase the market value to find your asking price. After you find the expected market price of your home, you should increase this number for your asking price. This will give you room to negotiate with a buyer and hopefully end up at the market price. The specific amount you should add will vary. You might be able to add $20,000 or more. If you plan on putting your home on the market, talk this over with your realtor to find the ideal asking price.
VALUE PER SQUARE FOOT
Figure out the price of comparable homes per square foot. If adjusting the prices of comparable properties seems too imprecise, you could also figure out how much comparable homes sold for based on square footage.
- Start by dividing sales prices by the homes’ square footage. You should end up with a price per square foot for each home on your list.
- Then arrange the list in order from highest to lowest.
- If you have a large gap between the highest or lowest number, cross it off the list. There are various reasons a house’s price per square foot is lower or higher: it could have been foreclosed on, it might be in a more expensive area, or the price may have just been too high or low for that house. For example, say your price per square foot range is like this: 40, 55, 57, 60, 62. The amount of $40/sq. foot seems very out of sync with the others. There may have been something wrong with that house that wasn’t reported on the data you found. Cross it off your list so it doesn’t artificially pull down your price.
- Average out the remaining numbers. From the previous example, we’re left with 55, 57, 60, and 62. The average of these numbers is 58.5 (55+57+60+62=234; 234/4=58.5). This means your house has a price per square foot of $58.50.
- Multiply the price per square foot by your home’s square footage. If your home has 2,000 sq. feet, than the estimated market value would be $117,000.
Compute the price it would take to replace your home. Another technique for estimating your property value is to add up all the costs necessary for completely rebuilding your home as it is. Find out how much it would take to construct every part of your home and property. This will probably entail talking to contractors and getting price quotes. When you’ve done so, you can add up the estimates to come to a final estimate of your home’s market price.
- Beware that this method, while it is used, tends to be inaccurate. The price comparison method is usually much more accurate because it pays attention to current trends in the housing market.