There seems to be a lot of confusion and ambiguity regarding home valuation and how exactly to best determine the fair market value of a property. For obvious reasons, the issue is paramount in importance to those in the investment community. Determining the fair market value of a property can be tricky but I believe the best practice is to combine several different methods when trying to ascertain a properties value.
Price Per Square Foot
A common metric used in determining a property’s value is price per square foot. Price per square foot has some value in that it helps to determine the outer boundaries of what price range a property should fall into, however price per square foot has some very serious limitations. Price per square foot fails to take into account some of the most important variables that affect home values. Some of these variables include the condition of the property, the location of the property, the quality of finishes, lot size, and absence or presence of parking. For condos variables like, floor, views, absence or presence of outdoor space, absence or presence of parking, and the type and nature of building amenities are not accounted for when price per square foot is compared between condos in the same neighborhood but different buildings. Price per square foot has value but it is not determinative in when calculating the value of a property.
“Zillow Told Me What My House Was Worth”
I’ve discussed before the inaccuracy of online home valuation tools specifically those provided by Zillow and other nationwide real estate portals. At the end of the day no algorithm, no matter how sophisticated, can replace the human element needed to determine a home’s value. That said, there is no harm in checking with online price valuation tools to get an idea of their value of the property. Be sure to review the home valuation accuracy, if provided, for each city on whatever online site you are using so you know how much weight to give the price estimate.
Fair Market Value Through Appraisals
Appraisals are generally considered the most reliable home valuation tool. An appraisal is nothing more than one person’s opinion of a property’s value but that person has been formally trained and certified in rendering opinions on home values. The best appraisals are those performed by appraisers who do most or all of their business in the subject property’s neighborhood. We all know how a few blocks can make a huge difference in location, especially in large cities, and thus value. Apples to apples getting a property appraised will generally give you the most accurate value of the home.
The comparables or comps method used by Realtors and appraisers attempts to find recent sales of homes of similar nature and quality as the subject property. Best practices dictate that you search for homes with similar appointments in the narrowest search radius that makes sense for homes that have sold in the past 6 months or less. Try to be as exact as possible when it comes to variables like home style, amount of stories, lot size, beds, baths, square footage, finish quality, garages and any other components that can significantly affect the home’s value.
Being able to reliably calculate the fair market value of a home is an essential tool for the real estate investor. Using a strategy that incorporates price per square foot, online algorithms, appraisals and comps will yield consistently reliable results and help the investor avoid overpaying for properties.