In this post, I’m going to dive a little deeper into a very important aspect of real estate: The question of how to establish the value of a home.
In order to do this, I’d like to explain how a comparative market analysis (CMA) works. Market analysis being the collection and computing of data to determine the value of a home. We professionals cringe when we look at sites like Zillow and others that provide consumers with “actual” dollar amounts of value for a home. It’s like nails on a chalk board for us. It’s like when in a horror movie the girl goes down the stairs and into the dark basement. Alone. Why!? Or in America’s Funniest Home Videos where the guy sits on a branch with a chainsaw and starts cutting it. You get the point.
The problem with those computer generated value numbers is this: They are sometimes right, sometimes too high, and sometimes too low but never consistent and never good enough to base anything important on them. They are misleading at best and can cost real money if they are being taken at face value.
The way I do a market analysis is very similar to that of a bank appraiser. Let me first mention that there is a significant difference between a market analysis for an apartment in a city and one for a home in a rural area. I have a good amount of buyers from the metro areas, be that New York City, Brooklyn, or others. A market analysis there is based on very different factors than one up here. For example, to establish the value of a home in Ulster County I would never use the dollar per square footage approach that is so common in NYC. There are too many other variables to make this an accurate and viable system.
For my CMA, I use an approach that is similar to bank appraisal guide lines. In the end, the bank has the last word on whether or not it agrees that the loan amount is justified and can be backed up by the value of the property. The banks are the ones who have final say on the values of about 90% of the properties up here. The other 10% is cash.
Banks generally require three comparable properties that have sold within a three to five mile radius and less than a year back. Some banks want three miles and six months, others have slightly different parameters. Those three comparable properties are very important and to choose the right ones is the most challenging task in the whole process of establishing value.
For example, the comparable houses have to be as similar as possible in square footage, acreage, condition, style, etc. If the differences are too big, they can’t be used as such. I would not use a 3,000 sqft house as a comparable sale for an 1,800 sqft home. I wouldn’t use a 1,000 sqft home either because the adjustments on both sides of the spectrum would be too large. Right now, if it’s not new construction, the adjustments are around $25 to $50 per square foot, depending on condition and age.
Next, I ask the following question: Would the same buyer who is interested in the subject property also potentially have bought the other three houses? Are they similar enough in style, age, and amenities? If the subject property is an old farmhouse, I can’t use a new Colonial as a comp because the same buyer would most likely not be interested in the Colonial. I have to find comparables that are most similar to the subject.
Here is where it gets interesting. You would think that a house with 2,800 sqft would be worth more than a house with 1,200 sqft. That’s not true. In fact, a 2.800 sqft house might be cheaper than a 1,200 sqft one. For example, you can get a 2,800 sqft house for $220,000 around here because that’s a family home with 4 bedrooms, 3 baths, maybe a large play room in the basement, etc. However, someone from the city might never buy it as a weekend place. A 1,200 sqft home might sell for $400,000 or more. The city buyer usually looks for a unique style or other amenities such as fire place or wood stove, screened in porch, wide board floors, privacy, exposed beams, sleek design, open layout, big windows, and such.
I want to make this clear as it is important to see that even if there are many houses with more square footage for less money, those houses can not be used to determine the value of our subject property. The 1,200 sqft house might still be much more valuable than a house with 2,800 sqft, based on all the other factors that come into play.
Once I determine the three comparable properties, and because I know for how much they sold for, I now ask the following question: “For how much would those three properties have sold if they had exactly the same features as the subject property.” For any differences, there is an adjustment. For example, half baths gets a $5,000 adjustment. Full baths get $10,000. There are adjustments for fire places, condition, quality and style of the kitchen, central air conditioning, privacy, views, finished basements, garages, streams and ponds, pools, dining rooms, family rooms, age, Jacuzzis, wooded vs. open land, decks, outbuildings, etc.
Let’s take land as another example: Meadow is more valuable than woods just because it’s more desirable to buyers in general. Just as we can’t establish the value of a home on square footage alone, we can’t establish the value of a piece of land based on the acreage. There are many factors that play into it and no parcel is like the other. That’s one of the reasons Ulster County is so attractive to buyers from all over the country. But that also makes it more difficult to establish the value of any given parcel.
I hope this clarifies not only the process but how much goes into it. We all know the saying that location, location, location is the most important aspect of a property. In my opinion, the most important aspect in marketing and selling a home is the price. Like the One Ring, it rules them all. It rules all the other characteristics. It trumps location. I have mentioned this in my previous newsletter but want to make this point again: No advertising, as genius as it might be; no website, as many hits as it might get; no personal network of the agent or brokerage firm; no New York City connections or New York Times full page color advertisement can do anything at all, if the price of a property is too high. It would be like driving a car in first gear and expecting it to go 65 miles an hour. It’s just not possible.
There are a few other considerations that go into a market analysis. I didn’t mention them before as they add to the whole picture only after the CMA has been done. There is the factor of competing properties. How many properties would the same buyer want to look at? If the subject property is one of ten, that would be very different than if the subject property is the only one of its kind. Having a unique property, however, can be a deterrent as well as an incentive. It depends. It’s very individualized and the more specific the market analysis, the better the outcome and the more precise the pricing will be.
There is the factor of time of year. Sometimes it makes sense to put a house on the market in the spring, at other times it makes more sense to put it on two months before everyone else goes on. It depends on the house, whether the inside is the selling factor or the outside, whether it looks better in the snow, or whether or not it has views during the winter. Again, it’s impossible to determine value without seeing the whole, the complete picture and setting it into the current market place.
There is a lot to consider when it comes to doing a market analysis. My point, if nothing else, was to get across that a CMA is no easy task and taking a value number out of thin air based on vague data is never in anyone’s best interest.
The market analysis is helpful for buyers and for sellers. I would not list a house without one and I wouldn’t have my buyers make an offer without me doing the same for them.
Stefan Bolz, Lic. RE Assoc. Broker, ABR, CRS, Westwood Metes & Bounds Realty, 134 Main Street, New Paltz, NY 12561, email: firstname.lastname@example.org, office: 845-255-9400, cell: 845-633-5223.