People are always looking for a “down and dirty” way to determine the value of a home and square footage seems to be one of the most common things used by people whether they are buyers, sellers or real estate agents. While it seems straight forward, there are several variances that can lead to inaccurate determinations.
The market data approach to value uses similar properties in size, location, condition and amenities to compare with the subject to arrive at a price. Differences in any of these things can affect the price per square foot. Appraisers are trained and licensed to make these adjustments but the differences are not necessarily objective and that is where opinions start to influence the value.
Even if a person were to make accurate adjustments, they would be based on the assumption that the square footage of the comparable properties is correct. That leads to the next area of concern: how was the subject property measured.
It is commonly accepted to the measure the outside of the dwelling on detached housing. Is it customary in this area to include porches and patios under roof and if so, do they get full value or only partial value? Is there any value given to the garage since it isn’t living area? What about other areas that do not have HVAC coverage?
Some areas don’t give consideration to basement square footage at all. Others might give some value if it is finished or has access directly to the outside like a walk-out basement. Similarly, attic space could be finished and under HVAC but if the ceiling height is not standard for the home, it may not receive value.
The problems become exacerbated when different comparables are not treated consistently and yet the common denominator ends up being an average of the square foot price of each. This is calculated by taking the sales price and dividing it by the number of square feet being quoted.
The source of the square footage should be listed to help determine the accuracy. It could be what the builder said it was to the original purchaser. If there is a set a plans available, that might seem credible but it is not uncommon for the builder to make changes while the home is being built which could increase or decrease the square footage.
Another source is the tax assessor. In many cases, they don’t actually measure the home but take the word of the builders or appraisers for it. If permits were obtained to add on to the home since it was built, it should be reflected in the square footage. However, sometimes permits are not secured properly.
After reading this, you may think that more doubts have been introduced than solutions and you are correct. It takes diligence on the part of all parties to determine the correct amount. The most highly trained person will be the appraiser and they should be measuring the home in its “as is” condition but understand that even a competent person can inadvertently make a mistake.
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The seller can put a price on the home but the value is ultimately, determined by the buyer. Individually, a buyer could pay over market value because they love the location, or the elevation of the home or the proximity to something that is important to them. The shortage of available homes resulting in increased competition among buyers could drive the value higher.
Most experts agree initially pricing it properly will generally result in the highest sales price. If a home starts out too high, it could actually sell for a lower price after it has been on the market for a while. It gives the impression that there must be something “wrong” with the house because it didn’t sell immediately.
So, how does a seller determine what price to put on the home? It has nothing to do with what the seller needs to get out of it. Nor does the price the seller paid for it make any difference now. Even if the seller made considerable improvements, they may not affect the value of the home.
There are three common sources for a seller to determine market value: an appraisal, a broker price opinion or an automated value model found online.
AVM, automated value models, are mathematical estimates that analyze limited public record data to determine a value. While this process can easily compare square footage, age, number of bedrooms as objective data, it is much more challenging to make adjustments for subjective data like appeal, quality of construction, floorplan and updating. Zillow Zestimates are the most common AVMs but there are many others providing similar services. It is important to note that many of these values are just gimmicks to get website traction and are not all that accurate.
Appraisals can only be made by a licensed appraiser. Most mortgages require an appraisal as part of the underwriting process to verify that there is ample collateral to secure the mortgage in case of default by the borrower. FHA, VA, FNMA, Freddie Mac and USDA as well as most private lenders require an appraisal especially for high loan-to-value mortgages. In some situations where the risk is lower, some lenders may use an AVM.
An appraisal requires the appraiser to visit the property, perform a visual inspection, analyze the property considering three approaches to value and accurately report the property information that is verifiable.
Broker Price Opinion, BPO, as the name indicates, is a price opinion on a property made by a licensed real estate agent. The determination of whether the estimate accurately reflects the market will depend on the experience of the agent with that type of property and market area. It is possible that a BPO could be more sensitive to the actual market because it will consider homes currently for sale and recently expired properties as well as comparable sales.
While all three methods, used recent, comparable sales to arrive at a value, the appraiser and the real estate professional can make a series of adjustments for the differences in the comparables. While the appraiser is highly trained in this technique, the real estate professional also adds credibility to this process based on their experience in how the buying public might react to specific features and the home in general including positive and negative influences.
Current condition of the property is very important for a number of reasons. In some price ranges, a buyer may only have the necessary down payment and closing costs but is not able to make improvements like paint, floor coverings, appliances or other major items. In this situation, a buyer would have to live with the house in its current condition until they could afford to make wanted improvements.
Investors may not be deterred by making an additional investment in the home after purchasing it but will probably be motivated to do so only if it will increase the potential profit to be made.
An AVM can be a tool that a homeowner, prospective buyer, mortgage officer, appraiser or real estate agent can use to get a quick idea of price but there are inherent limitations that can only be considered by personal examination balanced with experience in the market place.
Experience and understanding of the subject property and the marketplace are critical to having confidence that a value is accurate. Any person could go through the same steps to arrive at a value but an experienced, well-trained professional is far more likely to assess all of the variables more accurately. If you are curious what your home is worth, call us at (503) 851-1645 or email brianandnina@paramountoregon.
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