I was asked to explain how I value out a property. The method I am going to show is for desk jockeys doing a quick valuation, maybe on a prospective flip or just to get an idea of what their Single Family Residence might be worth. A professional, with access to the Local MLS, public records, reliable measurements and access to the property inspections will be able to get much better valuations.
For this example, I will use the single family residence at 13721 Easy St. NW., Gig Harbor, Washington, 98329 and I will be using free tools to generate this quick valuation, so that you can follow along at home.
The first step is to look at the subject property and take note of anything odd about the property. In this case, the property looks like it has been well cared for but lived in. It isn’t a recent flip and it isn’t a fixer. I would assume that this property is in average condition. Of course, if I decided to purchase this property I would do further due diligence, but for an initial valuation, just assume that what you see is what you get.
In a spreadsheet program, I always take note of the important features of the property. That is the address, the square footage, the last sold date and the bed/bath count. I am using Google Sheets for this lesson, although the industry uses Excel Models, especially for more complicated transactions.
The next step is to find comparable properties. The goal is to find a property that is exactly the same as the subject property and which sold recently. Using the Principle of Substitution, we can assume that subject property would sell for the same amount as the similar property. Unfortunately, real estate is unique and finding a very similar property is oftentimes difficult. The most important things to look for in a comp is distance to the subject property, (industry maximum is 3 miles), roughly the same liveable square footage (500 ft. either way), building style and use (this is subjective) and similar external obsolescence.
External Obsolescence is a term of art that refers to anything that is off of the property that negatively affects the value of the property. Examples could be if the property is on a corner, in the flight path of an airport, or next to an annoying business. When we are coming up with a value for a property with External Obsolescence, don’t try to assume how much the obsolescence affects the value. Instead, find properties that have the same External Obsolescence. Luckily, our subject property doesn’t have any external obsolescence, but some of the comps have lake front views. That is considered a positive. Because I don’t know how much that view is worth monetarily, i am going to ignore those properties as comparable. I can do that because there are other comps available.
I like to use three recent comps. Looking at the map in zillow, it looks like the properties are going to run between 350k and 250k.
The first comp is 14017 Holly Burn Ln NW. The property is essentially a model match as the subject. It is 3 bed 2 bath, 1102 square feet and the comp sold May 29th. That is about 7 days ago, so the sales date is very recent. The only difference between the subject property and this property, is that Holly Burn Lane was recently updated. The property looks to be professionally staged and I suspect the property was recently remodeled. If I was wondering what the after repair value of the subject property is, well… this is it.
Comp # 2 is 14020 Meadowlark Dr NW. This property is a comp but it feels different than the subject property. It is roughly the same size but the style is a bit different. I think that explains why the value might be lower. Still, it gives me another data point, even if I can’t put my finger on how this property is different. Trust your instincts when you are looking for investment deals. It is better to walk away from a good deal than say yes to a bad deal. By including this property in the comparable set, our valuation may take into account the market realities.
Comp # 3 is 14818 Evergreen Ln NW. This is probably the best comp of the bunch. It is the same size as the subject and it has the same quality of finish. The major difference between the subject this property is that this comp has 3 bed and 1 bath while the subject property is 3 bed and 2 bath. Most of the value of a property is based on the square footage, not on the bed bath count. Of course, the additional bath in the subject makes the subject worth a bit more but I would say that this property gives the best insight into the value of the subject. While it isn’t a model match, I feel like a small adjustment of 10k will accurately reflect the superior value in the subject property.
As a sanity check, I took all three properties and averaged out the value on a price per square foot basis. Then I multiplied that number by the subject properties square footage.
From the information I gathered here, I would say that the “as is” value is somewhere around 280-290k. Of course, I would try to argue that the property is worth 270k for negotiation purposes. I also know that the final after repair value is about 350k.
Unfortunately the subject property wouldn’t work as a flip for those prices. I assume about 15 dollars a square foot for rehab and about 7% in closing costs. If I bought the property at 290k, I would spend about 16k on rehab and about 24,500 for closing costs. That would mean my all in costs would be 330,500 leaving me a profit of about 20k if everything went perfectly. That is only 6 percent profit and doesn’t include ongoing holding costs, financing costs or cost overruns. Industry standard is something like a 20% return, which adequately reflects the amount of risk inherent in holding a spec house flip. If I were a flipper, I would be looking to get into this property at about 250k.
One other thing to note is that I don’t understand the wide discrepancy in the values of the homes. 100 dollars a square foot is a lot of money, and the build quality looks to be relatively uniform. This is where have a local area specialist on your team and doing further due diligence is required.