Determining Property Value the Right Way
– Discover the right way to determining property value.
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- Determining Property Value the Right Way
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I agree on many of Phil’s views in the videos I’ve seen so far. A few more comments: as he said the property appraisers (PA) don’t have access to the property, and in part of the process in calculating value will measure the outside of the property. In the case of a 2-story structure, the PA doubles the SF to play a role in the assessed value. TRUE STORY: What happens when the home has a balcony overlooking the living area on the main floor? Looking outside at the roof line, the front part of the roof is much longer than the back? More than half of the upstairs bedroom area is not livable – but the PA office doesn’t (will not in Lee County Florida) adjust the assessed value. The mis-assessment may become apparent when an appraiser goes inside the home and measurements are made. The result may be that the appraisal comes in lower than the assessed value.
I’m a professional RE appraiser, this is very good advice. Just one caveat: You must be brutally honest with yourself about the realistic value of a property that you have a vested interest in. Don’t cherry pick the comps to confirm your bias. If you cannot do this, or lack experience in a particular market, it may be wise to seek the council of a knowledgeable 3rd party.
Beta Eta confirmation bias is a hell of a drug. You’re 100% right. People with a vested interest often pick out comps that support their bias.
Comparisons. Houses that have sold in the same area that can validate the price
Where is the best place for me to start getting some experience with real estate investing?
If you are counting on YouTube comment replies to direct you, you should probably pass on this one
where you live, do you own or rent, if you rent, buy something and build equity while you live in it.
Great video, Phil! Thanks so much for sharing your insights. One question: in your opinion, what criteria should investors use to determine reasonable comps on the MLS?
# 1 is proximity to the subject property.
The only thing wrong with sales price is that the sales price can be grossly overstated, especially in real estate (remember the real estate crash, and ensuing economic crash?). At one point, sellers were getting into bidding wars over properties and the final sales may have been way over the top compared to what it should have been, if the price had been grounded in something more repeatable, like construction cost for example, which wasn’t even mentioned in this presentation. At one point, banks and realtors were very motivated to originate loans or sales at the highest price possible, again with no grounding in objective fact. In terms of assessing, “chasing the sale” is sometimes a quick way (read: less work) around actually determining the value. However, since this is about making money more than anything else, realistic values are not as important as high values, regardless what the long term economic pitfalls might be.
Love your comment, “don’t rely on computers”. We need more people like you to tell that to the “powers at hand” trying to push the appraisal industry in that direction and force appraisers to be data entry clerks with fees to match.
Phil, THANK YOU!!!! I am a newer agent and all the people in my office say to do a radius of 3 miles that may or may not be in the same neighborhood. Not the same product if you ask me. How many comparable properties should I use? The people I have asked how to do this do over 50 and in the last year, because the tax assessor says to.
So so many people do this wrong. My thoughts on why someone does this is to get the listing, raise the market value so the owner of the home feels like the realtor is on their side. FALSE! It will cost money and you will lose money by staying on the market longer. I am following you now! Thank you for your videos!! You rock!
You nailed it. When someone sells their own properties to earn their living, they no longer pull comps with the agenda of getting the listing; instead, they pull comps to accurately reflect what the house will truly sell for. The difference can be enormous. I pull every comparable closed and active comp; sometimes there are only a few, other times there are 6-10. It’s not how many you pull, it’s that you pull ALL the most comparable listings.
Lindsay Berry yea I just bought a home it was on the market for 6 months
They went from 385 to 370 365 then I bought it for 354
I’m sure they were paying $2000+ payments
Also buyers see 6 months on the market and offer very low bids (like I did) because time was on my side.
And seller may get desperate or just want the peace of mind.
You are a champion, no B.S straight to the point speaking from experience. I have been trying to read textbooks etc on appraisal techniques, all it did was leave me feeling angry.
Thanks Phil! Your explanation was clear, engaging, and helpful!
Great Videos. All new and old home owner should take a crash course from you before they buy any new home. Thank you again to helping the community!
Good central point of not relying on computers and algorithms to do your analysis. But the income and cost approaches to valuation are very important and shouldn’t be overlooked, especially for investors who are presumably using buy-and-hold and/or fix-and-flip strategies.
Income approach only truly applies to commercial real estate. Even 2-4 units rely on comparable sales analysis for valuation.
True, from an appraiser’s perspective the comparable sales approach is usually weighted more, even on a 4 unit investment property. But there’s a section on Fannie’s small income property appraisal forms to analyse the income approach, and some appraisers place at least some weight on that approach when rental data is available. But what I’m saying is, investors considering a buy-and-hold strategy should place some weight on the income approach and more emphasis on a property’s net operating income, regardless of what an appraiser considers. Of course, I’m biased, being from the SF Bay Area, where buying with severely negative cash flow (and often with protected, rent controlled tenants) is commonplace, because people are content to go off comparables and bank on appreciation. Scary Stuff.
Great video on valuing the property.
Thank you Phil for that incredible content. I just stumbled across your channel today and I am amazed of that quality you putting out here. This is highly appreciated!
Hi Phil. Thank you for that great video. Have a question. Do you or your students still ask for someone elses opinion when appraising/valuing a house some of the time? I am in my second year as a Real Estate Agent, have done 150 individual appraisals and still get it wrong at times. Or do you eventually just become so good that you are accurate 98% of the time and don’t need anyones help? Cheers Oliver
You become so good that you are much better at predicting what a property will sell for than any other appraiser or agent you could get advise from.
Thanks for your reply Phil. That’s a lot of encouragement in one sentence! Cheers Oliver
You also need to consider the extra amenities that comes with the home, such as in ground pools, decks, attached garage etc
And the types of building material used in construction such as brick facade vs vinyl siding, counter tops, walkways, tool sheds, bathroom materials, flooring materials etc. In the end the homeowner should set the price, not the agent. The agent should only find and do the comparisons and make the recommendation.
This is a great video to share with clients, thanks for simplifying it.
This is a very introductory lesson but it IS ACURATE! I own a Title Search company and I deal with a lot of this on the daily basis.
There is one other thing I like to consider: the cost of land + construction. Doing this should give you a ball park of the cost of the house, if the house is much more expensive than the land + construction then you should not buy that house and be better off with building your own house. Another way to determine the value is by the average rent per room in that area considering the bathrooms. If the mortgage is above the average rent at 3.5% down, that house is too expensive. Your mortgage should always be less than rent because you’ll be paying repair costs and have higher risk. The next is to find houses that are exactly the same quality, size, number of rooms and bathrooms, and year built of the house want to value and take an average of that. It can give you a reasonable estimate but not always, because a lot of people buy overpriced or sometimes underpriced houses which will skew your numbers. If you find a high quality remodeled house but the house you are looking at is outdated or broken, you should get a contractor to give you some repair estimates and inconvenience costs then you’ll know the value. I generally do not like appraisals that only look at what others have bought/sold in the area because it doesn’t take into account that favorable economic terms or good mortgage rates that cause people to overpay for properties.
Research price of surrounding properties. Check neighbor hood building restrictions. Sometimes people come into a great neighborhood and set up a hudge bus repair service. / or etc. Massage / etc.
In Tennessee , Public libraries have a monthly free magazine relating to all court house/ activities. HOUSES LAND ,bought/ sold/ prices, former owner/ etc, in each zip code. BUILDING PERMITS OBTAINED/ Marriages/ divorces/.. court activities…
I am amazed of all your tremendous great information,you are definitely a great instructor I’m just soaking in all your knowledge. Thank you.
Good video on determining property values. We use the county tax roll only for information. Zillow prices are known to be off in our state by up to 10% or higher. The old saying that I was taught is, You can price something at any price but you have to have a buyer that wants it at that price.
AGAIN! Phil, you have hit the nail on the head that much of the propaganda of real estate boils down to understanding the human psychology behind it.
Computers do not have human understanding OR intuition!
Thanks for another clear, transparent, communication.
-Future Seller 🙂