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By Douglas Gray Many people are confused as to how to realistically evaluate a house or condominium. The accuracy of the evaluation is based on the type of formulas applied. Ultimately, a motivated buyer and seller, combined with other factors, influence the final price. The two most common formulas are the market comparison approach and the cost approach. Market Comparison Approach This is probably the most easily understood evaluation concept for a home buyer or investor. It is also the formula most commonly used by real estate agents for approximating the value of a single-family dwelling or condominium. It involves a comparison of similar homes to the one you are considering, normally generated by the multiple listing service (MLS) computer database. A printout can be provided to you by the realtor. Since no two homes are exactly the same due to factors such as age, location, layout, size, features and quality differences, try to obtain comparables that are as similar as possible. You want to have the sale dates as current as possible so that they reflect the same market conditions. You may have to make adjustments to the comparable properties to make them more realistic comparisons when you determine prices. For example, making price adjustments for such matters as the circumstances of the sale (forced sale due to financial problems, foreclosure, etc.), special features of the property (flower garden, shrubs, arboretum, etc.) and the location of the property (view, privacy, etc.). The market comparison approach lends itself to situations where there are more properties and more frequent sales, and therefore comparison is simpler. At least it gives you a feeling for the appropriate value. Generally, when a professional appraiser is doing a market comparison appraisal, comparisons are made of recent sales of similar properties, similar properties currently on the market and properties that did not sell (listings expired). The limitation of the market comparison approach is that similar properties may not be available for comparison in a particular situation. Also, it is difficult to know the motivations of the vendors of the comparable properties, so in some cases the sale price might not reflect the fair market price. For example, comparing a condominium for sale against two other identical condos in the same complex that have been sold very recently will give you a fairly close comparison. You could calculate the cost per square foot of the two recent condo sales, and compare it with the cost per square foot of the one you are considering. If the latter price is higher, you want to know why. Perhaps it has a better view, or is on a higher floor, or maybe the previous owner made a lot of interior decorating changes to improve the condo. The point is that the market comparison approach does have its limitations, and provides general guidelines only. Cost Approach This approach involves calculating the cost to buy the land and to construct an equivalent type of building on the property you are considering with appropriate adjustments for depreciation, and then comparing the end prices. The limitation of the cost approach is that depreciation might be difficult to correctly estimate. In addition, construction costs vary, depending on location, supply and demand and inflation. Again, the cost approach value is an estimate only. For single-family houses and condominiums, the professional appraiser normally arrives at an estimate of value as of a certain date by adding the market and cost approach values, and dividing by two. The key benefit of the market and cost evaluation methods is that they can usually be used quickly to determine if the owner is asking too much, or if the asking price is a bargain. Remember, the rules of thumb are guidelines only. The calculations could also provide you with negotiating leverage to have the purchase price reduced. You will, of course, want to consider other factors before making your final decision. Also, keep in mind that the values are estimates of what that average person would pay. You may not be prepared to pay the estimated price for various reasons; if the market is starting to decline, for example. Conversely, you might be prepared to pay more than the average person-for example, you might be aware of a possible zoning change, subdivision potential, or proposed development nearby. Or possibly the house has a basement suite that could generate extra income. Remember, the process of evaluation is a combination of objective and subjective assessments. A realtor can provide an approximate evaluation, while a professional appraiser will provide a more precise evaluation. Refer to the Yellow Pages under real estate appraisers for the names of professional appraisers. Copyright 2001 Douglas Gray Back to www.realestate1o1.com |
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