Determining Property Values in this Recovering Market

Let’s refresh our knowledge a little on the CMA, Comparative Market Analysis and then see if it needs to be adjusted a bit in today’s mixed retail and foreclosure market. The CMA is used by the vast majority of real estate professionals to determine the current market value of a home. Listing agents use the CMA to determine the optimal price at which to list a home for a quick sale and maximum dollars to the seller. Buyer agents use it to compare listed homes and to show their buyer clients the actual value of the home if it appears to be overvalued or undervalued.
There are several steps in the process, none difficult, but all important and requiring accuracy and good judgment:
1. Get information on recently sold properties that are very similar in style, size and number of rooms, bedrooms, baths, etc.
2. Work with homes as near to the subject property you’re valuing as possible.
3. Get sold prices as current as possible; don’t go back too far in time as those sold numbers will be old and the market is constantly changing.
4. Once you get three to six good comps (comparables) make some adjustments if necessary to bring their sold prices to what they would have been if the home was identical to your subject property:
a. Add the value of a bedroom if the comp has one less bedroom, subtract if it has one more.
b. Do the same for baths.
c. Adjust the sale price for square footage differences. If your subject property is 2000 square feet and your comp is 2200, divide the sold price by 2200 and then multiply it by 2000 to adjust it downward to better compare to your subject home.
d. Once you’ve adjusted the comps, you can average their sold price per square foot.
e. Use that average sold price per square foot times the square footage of your subject home to come up with an approximate valuation.
f. Do it all again with currently listed comparable properties using the list prices. This is to get the current competition nailed down.
g. Adjust the value of the subject property if it appears the market is slower or faster or current prices are much higher or lower. In other words, if you came up with a value of $100,000 using the sold prices and there are fewer comps on the market right now and they’re listed at an average of $130,000, you may be able to increase the value of the subject property for the current market.
The question now is should you be using foreclosures as comparables, and the answer is no. Stick with retail market sold and listed properties not bank owned or listed as short sales. Whether you’re going to rent out the home or flip it to another investor, you want to know the “in good repair” and ready-to-occupy value. Also, try to get your sold information from a real estate professional, as it’s going to be more accurate than from a site like Zillow or Trulia.