Tuesday, January 26, 2016 / by Steven Laakso
Market Valuation in a Fluctuating Market
When finding the right price to sell your home comparing your place to other homes that have sold is key. What else?
While many factors come into play when you're evaluating a residential property's value by "comps" (comparable sales), the three key factors are location, size (square footage) of the home, and the number of bedrooms and bathrooms.
Obviously, you'll need to look at many other aspects before you can pinpoint the exact value of a property, but these are the "big three." You should be able to look at comparable sales involving properties with these three factors and get a good idea of the value of the property you're selling.
Location is extremely important when you're comparing sold properties. A professional appraiser typically looks at houses within a one-mile radius or less, and so should you. In the case of a subdivision, where the houses are all similar and built in the same time period, you need to compare similar houses with similar styles in the same subdivision to get an accurate valuation.
If there's a wide mix of properties in the subdivision, you may need to go outside of it to get comparable sales. Just be careful with "dividing lines." Geographic lines such as opposite sides of the river, the park, or a main highway can be invisible dividing lines that put the property in another school district and may not garner equitable comps.
When determining a home's value, be sure to evaluate the square footage. Note that appraisers typically look at homes that are within 20% up or down in square footage as comparables. Generally (especially within a subdivision), most homes fall within a fairly limited size range. Therefore, you should be able to develop a good gauge for the selling price of homes in those particular sizes.
Of course, not all square footage is created equal. Most people think that if a house has 1,000 square feet and is worth $100,000, then the 1,100 square-foot house next door would be worth $110,000. Wrong! The extra 10% in square footage equals only a few percentage points in value. If these two houses offer the same location, style, and number of bedrooms and baths, the 10% additional square footage won't change the valuation much.
Why? Because there is a fixed cost on a house based on the value of the land, cost of construction, sewer, subdivision plans, and other factors. An extra few hundred feet of space involves very little cost--only wood, nails, carpet, and possibly some minor electrical and plumbing costs.
3. Bedrooms & bathrooms
The number of bathrooms and bedrooms is more relevant than simply the raw square footage. In other words, a three-bedroom home with 1,200 square feet might be worth more than a two-bedroom home with 1,250 square feet. It also matters where the bedrooms and bathrooms are located--on the main floor or the basement.
While finished basements can add value, the amount of that value is less than it is for above-ground living areas. Plus, this greatly varies depending on different regions of the country. In humid areas, below-ground living space isn't as valuable to homeowners as in dryer areas of the country.
To determine a home's value using comps, also look at the quality and number of bedrooms and bathrooms. Three-bedroom homes are generally a big plus over two-bedroom homes, but four or five-bedroom homes don't add as much over a three-bedroom if they are roughly the same size in square footage. Likewise, two bathrooms is a big plus over one bathroom, but three or more don't add as much value.
When comparing bathrooms, make sure you understand the different types of bathrooms and compare them correctly. A full bathroom includes a shower, bath, toilet, and sink. A three-quarter bath has a shower but no tub, plus a toilet and sink. A half bath has a toilet and sink but no tub or shower.
A three-quarter or full-bath create roughly the same value, particularly if another bathroom in the house has a tub. A half-bath has less value unless there are enough other bathrooms in the house. Also, a five-piece bath (separate shower and tub) generally wouldn't add more value than a regular full bathroom with a combination shower and tub.
There are other factors to consider that affect the value of a home, but generally you'd give these less weight than the location, size, and number of bedrooms and bathrooms. Some houses have one-car or two-car garages, some have carports, and others have neither. The garage factors in some value, depending on the rest of the neighborhood.
For example, if the neighborhood comps all have two-car garages, this can affect value as much as 10% on the subject property if it only has a one-car garage or no garage. However, if the houses are all small and there's a mix of garage options, the garage won't be as big of an issue. Likewise, a four-car garage in a three-car-garage-neighborhood probably won't count for much either.
One exception is with condominium developments. Parking spots or garages are generally sold with condominiums and can have substantial value, particularly in large cities where parking is limited to the street.