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How to Determine What Your House is Worth in 10 Easy Steps

by Chris Feltus on March 21, 2014 · 21 comments

  
What is the value of your house?

When selecting comparables, think about the word carefully… comparable. It’s in the word itself yet so many seem to forget this at times. You are trying to identify comparable properties, comparing apples to apples, or like to like. You want to attempt to pull comps like an appraiser would. With that in mind…

Here are some ground rules to help you make an informed decision when determining ARV:

1. Try and stay in the subject properties subdivision. If there is not enough activity in the subject properties subdivision you can go out in a radius or other subdivisions across local roads. Try and pick similar subdivisions with the same housing inventory/ amenities etc. How far your radius will go out will depend on where you live. Here in Texas, in the suburbs you can typically go out .5 – 1 mile and be pretty safe with your comps. However, using that same radius in the inner city of Philadelphia will not work, prices can vary wildly from one block or street to another. Don’t go across major roads or rail road lines if possible. Neighborhood makeup can change drastically in doing so. If you do this, make sure to drive the comps to make sure both the properties and neighborhoods are comparable.

2. Finish out level. Make sure to gauge what level of finish out the comparables have.  Try to match it or slightly over, if you over improve a house it is going to cost you money.

3. Compare properties with similar square footage. Typically, the max I go is + or – 20%.

4. Make sure to DRIVE your comps. Don’t try and be a desktop appraiser. Besides, taking the time to drive the comps and ensure they are accurate will help you become an expert on housing inventory in your area.

5. Beds, baths, and garages. For instance, if your subject property is a 3/2.5/2 (3 bedroom, 2 and a half bath, 2 car garage) then don’t select a 2/1 as a comp. These are not comparable. With larger homes its typically acceptable to have some variance with the bedrooms. A 3/2/2 and a 4/2/2 can often be similar; however, the difference between a 3/2/2 and a 2/1 is night and day. A possible exception to this “rule” would be if the subject property can have a bedroom or bathroom added to make it match the comps.

6. Sometimes the comps in the area are so weak you won’t be able to find much of anything. In such cases I typically make a very conservative offer, typically 55-60% ARV minus repairs of what the properties tax assessed value is. Tax assessed value, at least here in Texas, tends to be conservative and lower than market value. Remember tax value has nothing to do with market value, it is simply a mechanism to help generate tax revenue. Tax value can be below or above the true market value of a property (or spot on due to a roll of the dice).

7. Pick a similar house style as your subject property. If your subject property is tutor style, don’t pick ranch style homes as your comps. Similarly, if the exterior is brick on your subject property, don’t select wooden frame houses either.

8. Go back 6 months for the most recent comps. Time is a factor when selecting comps. Sometimes when the comps are less than ideal you can go back 8-9 months. But make sure to examine how the market has changed since then? Has it improved or worsened? Try to  apply this to your evaluations.

9. Year built, try and stay within +/- 10 years of the subject property or better when pulling comps. If you initially run comps with criteria (bed bath garage, sq footage, year built etc) and you are still bombarded with results, narrow your criteria a bit. Perhaps get a bit closer on the year built, square footage etc. to the subject property.

10. Lot size. This is typically a larger factor in homes of newer construction. For instance I recently looked at a house where I found 4 of the same housing product, yet 2 of them sold for 165, and the other 2 sold for 195. What was the difference? The 2 that sold for 195 were sitting on a little over half an acre and had more lot front footage, compared to the others at 165 that had less front footage and roughly a quarter of an acre. Sometimes lot size is easily overlooked.

Estimating the ARV is a mix of an art and a science. You remember the scientific method? We are trying to make an EDUCATED HYPOTHESIS as to what the house is worth, it’s not an exact science. Hope this helped. If you have any questions please leave them in the comments below and I will do my best to help you!

Related: Four Steps To Determine A Home’s Fair Market Value

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{ 21 comments… read them below or add one }

Matt S March 21, 2014 at 7:30 am

Thanks for the article, Chris. I fall into over analyzing ARV. I know what I’m looking for, but the comps vary widely depending on which website/service you are using. I find that those also vary from ARV comps from a realtor as well. What are your thoughts on comps from a Realtor and would you just go with say 75-80% of those comps as your ARV?

Thanks,
Matt S.

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Chris Feltus March 21, 2014 at 7:47 am

Hey Matt,

You should always use comps that come directly from the MLS. Different third party websites and services vary in estimating what a house is worth because they utilize an algorithm. These values can fluctuate wildly compared to the properties real market value. These tools are fine to use to get a general feel of home values for a given neighborhood, but a poor substitute when attempting to use to find the specific value of a given subject property. Redfin however does have partial MLS data in some markets; however, it is still best that you either work with a realtor or become licensed yourself to determine a properties value.

No I don’t take 75-80% of comps and use that as my ARV. I pick comparable properties utilizing the guidelines in this blog post to pick targeted properties that are most comparable to my subject property.

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Matt S March 21, 2014 at 9:09 am

Thanks, Chris.
I asked the question about the comps because I was doing my comps for a property and the comps from the realtor were much higher (like $#0k higher). If those are more accurate, then that makes this possible deal much better!

Thanks again.

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Chris Feltus March 21, 2014 at 9:13 am

Hey Matt,

Just because a realtor has access to comps does not mean they can pull them correctly. If you feel these are quite a bit higher than what you expected consider going through the steps outlined in this blog post. Some realtors really have no idea how to determine value, they will just pull everything in a .5 mile to 1 mile radius and take the average $ / psf and use that to price the house. Of course using this approach can make you over price or under price the house.

I would have them pull comps within the subdivision and recommend you do the due diligence yourself and verify their numbers.

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Jordan March 21, 2014 at 2:34 pm

Thanks Chris. I’m actually a first time buyer and these tips will help me determine the real value of a home I might buy.

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Chris Feltus March 22, 2014 at 9:26 pm

Thanks for reading Jordan. I wish you the best of luck finding a home.

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Foster March 22, 2014 at 5:23 pm

Hello Chris and thank you for your well written article.
I have also found it helpful that when my subject property is vacant to talk to the neighbors to find out the condition of the interior and if anything interesting is going on the neighborhood.
Regards
Foster

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Chris Feltus March 22, 2014 at 9:28 pm

Thanks Foster, appreciate it.
Yes talking to neighbors can be invaluable. Not only to understand whats going on in the neighborhood, but it can also help you assess ARV. Sometimes properties are sold off the MLS and neighbors can be a great resource to uncover the details. For instance, some HOAs have a system in place that deals directly with potential buyers on a waiting list before they are able to list them.

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Jerry March 23, 2014 at 7:50 am

Thanks Chris, for this very informative article being a newbie in real estate game, this gives me some idea of where to start and how to start looking for ARV’s. I guess my next step would be to get access to the MLS and learn how to use it correctly. Again thanks so much for this insight.

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Chris Feltus March 23, 2014 at 8:27 am

Thanks Jerry appreciate it. Yes you will need MLS access in some form or fashion, whether you become licensed yourself, you pair up with an agent or seeing if there is a 3rd party program available in your area that has MLS data.

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Bob March 23, 2014 at 9:18 am

Groan. Some of the advice you folks are really scary! Please leave market valuation or ARV or ASP to a state certified appraiser. Preferably one of the 22,000 desigjnated members of the Appraisal Institute. It takes six (6) years to be eligible to sit for the Florida state certified exam. No fast track. No short cuts. No comparison. An MAI or SRA designation takes between 5 and 11 years. I completed the week long real estate course on line in 1 and 1/2 days and passed state exam in 33 minutes. Broker’s exam was more challenging but piece of cake. Serious investors understand the value of an appraiser who is also a broker. Price and market value are not the same. To think a realtor or an investor can accurately “value” a property is absurd. Save yourself huge financial mistakes. You’re investing thousands of dollars. Maybe hundreds of thousands. Not buying a lawn mower, furntiure or a car. Pay a residential appraiser $600, or a commercial apprasier $2,500 + and get a quality market analysis and value. Or roll the dice.

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brian March 23, 2014 at 9:50 am

Bob
In response I would say appraisers aren’t always accurate either and I’ve been on the receiving end of many botched appraisals with appraisers using incorrect comps or assumptions. Most of the bad appraisals I’ve seen are in residential space and many experienced investors know values better than appraisers especially in their niche target markets because they know the sold comps and repair costs. Appraisers are very useful for commercial deals. Anyways I think investors who really know their market can do just fine without appraiser.

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Chris Feltus March 24, 2014 at 9:40 am

Brian, agreed well said.

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Chris Feltus March 23, 2014 at 9:54 am

Sorry Bob, but I strongly disagree. There is certainly value in an appraisal, but if the comps are strong and especially if I have bought and sold a property in the same subdivision as the subject property, I find its not usually needed. However there are definitely some situations where I would recommend it such as: if you are new to real estate, need to be me more conservative or need more confidence, dealing with commercial property or dealing with a very specific high end retail market.

For instance, we purchased a home back in September, at the time the comps in the area were coming in around 75k for ARV. My partner and I both agreed, even though the comps were not showing it, in our gut, we knew the area and felt the home was worth quite a bit more. The home received multiple offers and it sold for over 90k. Again the comps did not show that. Sometimes this just comes down to experience and mastering your local areas. I doubt most appraisers would have been able to advise us that we could sell the house for that much more.

Its not a “roll of the dice” as you claim if your numbers are grounded in reality. The story is all there, you just need to analyze the neighborhood and the MLS to piece the puzzle together.

All the best.

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Mehran Kamari March 23, 2014 at 9:45 am

Chris, thanks for the article! I made the mistake of using a comp that was across a neighborhood boundary, even though it was only a few streets over. The appraiser didn’t use that “favorable” comp and the appraisal came in about $20k less than I expected. Was using all my own cash on the deal so I was able to absorb the mistake. Lesson learned!

Very important article for any RE Investor to read!

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Chris Feltus March 23, 2014 at 10:01 am

Thanks for the feedback Mehran, greatly appreciated. Yes, staying within the boundaries of the subject properties subdivision is very important, as you have learned. Sometimes it is acceptable to go across boundaries, but you must proceed with extreme caution, make sure to drive the comps and verify both the houses and neighborhoods are comparable.

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Bob March 23, 2014 at 10:35 am

Chris,

ARV is a term that doesn’t exist in valuation or lending. It’s something sales asscoiates invented because they are prohibited from rendering a value opinion. Brokers are too in federal related trasnactions. Market value is not the same. Read the defintiion of market value established by FIRREA. Valuation is not as easy as you make it sound. That’s what scares me on behalf of others. If it were that easy, everyone would just pull three comps and throw a dart. The educational component required to be competent alone proves that.

Let’s take Adjusting for Seller or Financing Concessions. Concessions will generally fall into two categories: sales concessions and financing concessions. Sales concessions would be the inclusion of personal property, settlement assistance or seller contributions and cash incentives. Financing concessions are special or creative financing and seller discount points or buy-down programs.

You look at a “Comp” and see the sale price is $103,000.

Sale price was $103,000 with a seller-financed note of $95,000 at 6.0% on a 10- year balloon and 30-year amortization. Market terms at the time the contract was written were 6.5% for 30 years.

Calculate Monthly Payment of Seller Financing = $ 569.57 (6.0% /30 Year Amt/$ 95,000 Loan)

Calculate Present Value of $569.57 per month for 10 years at Market Rate of 6.5% = $50,161.18

Calculate Remaining Mortgage Balance of Loan in 10 years (6% Rate) of which Equals $ 79,501.44

Calculate Present Value of the Mortgage Balance ($ 79,501.44) at 6.5% Equals $41,576.26

Sum the Present Value of Monthly Payments and Present Value of Mortgage Balance = $91,737.44

Add the Down Payment of $8,000 ($103,000 – $95,000) to Sum of Present Values = $8,000
Result is the Sale Price adjusted for Seller Financing = $99,737.44

Given the sale price of $103,000 and “market equivalent” price of $99,737.44, the impact of the favorable financing on this sale appears to be $3,262.56.

Therefore, $99,700 (rounded) would represent the cash equivalent price.

So no. The ‘Comp” did not actually sell for $103,000 did it?

This is just the FIRST Adjustment we make in the sequence of adjustments. Yep. Easy. Just find a few sales and pull it all together.

Sell crazy somewhere else. We’re all stocked up here Chris.

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Bob March 23, 2014 at 11:27 am

The title of my post is “Whatever happened to realtor Johnny.”

Johnny renders a value opinion to investor. Says a property is worth a $100,000. Investor buys property based on advice from Johnny.

Subsequently, Investor loses money. Maybe the market rent was wrong. Or the repair estimate. Or the value. Maybe a divorce. Maybe a partnership issue. Investor is unhappy. Maybe investor is cranky.

Maybe the investor is unhappy because he overpays for a property. Gee. That’s never happened before.

Investor sues.

On the advice from counsel, investor sues realtor Johnny. And his broker. And all the other realtors involved in the transaction. And the seller.

Per state law, the lawsuit is publicly noticed. Now Johnny’s name is all over the internet mentioned in a lawsuit. That’s not good for business.

Investor’s Counsel engages Bob the appraiser. Bob is a state certified appraiser, broker, licensed RE instructor and a court admitted expert witness in three counties. Bob is qualified to render value opinions.

Bob develops an appraisal on the property. His supported valuation is $80,000. Why the $20,000 difference?

Because Johnny did not adjust – or did not know how to adjust – for seller concessions. Or finance concessions. Or cash equivalency. Or condition of sale. Or adjust properly for location, view, GLA, BR, BA, etc.

Counsel asks Johnny to please explain to the court what a financing adjustment is and how do you do it? Counsel asks Johnny how he supported his value. Where is his quantitative support and the steps he used?

Johnny cannot produce credible support for his valuation.

Counsel produces an article to the court Johnny wrote on Bigger Pockets. Giving advice to investors. On how easy it is to determine your home’s value. Just ten easy steps!

Uh Oh. Bye Johnny.

Be careful. Stick with what you know. Or learn what you want to know.

Good judgment comes from experience. Experience comes from bad judgment.

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Bob March 23, 2014 at 1:30 pm

@Brian. I don’t disagree. And your are right on the commercial and industrial side. Most investors use more than one appraiser. And development costs and EI/EP backs into the land price you pay. The numbers either work or they do not.

Yes. i’ve seen poor appraisal work. I’ve seen it when they got the value wrong. And terrible work but got the value right. Kindo of like unrealstic investors. Or developers who think the reason they will suucceed is not due to real estate market fundamentals. But because their product is “unique.” Lol. On my have I heard that a few times. You can make a car out of bubble gum, paint it chartuse and it’s unique. Doesn’t mean that somone will buy it. See Microsoft and Apple’s failed product lines.

But if you mean botched appraisals relative to “not making your deal work”, well, that’s not the role of appraisers. Our responsibility is to the public trust. Some investors think MAI stands for; Made As Is. I don’t think so bubba.

I tell all investors. Go to a market. Ask the realtors the name of the appraiser they love. Don’t use that one. That’s the appraiser who makes the deal work.

Then ask them who they hate. That’s the one you want. Assuming of course you want a supported credible value by an Independent, Impartial and Objective appraiser.

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luke March 23, 2014 at 2:30 pm

Chris,
You said ten EASY steps…come on, your steps take some time and work. Good thing there is plenty of software to help!

Luke,

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Chris Feltus March 23, 2014 at 2:45 pm

Hey Luke,

Thanks for reading. I did not personally choose the name for the title, BP does.

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