The cookie cutter properties are the easy ones. But have you ever felt like you were just guessing at the value when dealing with something unique? Or maybe it seemed like you were throwing darts at a dartboard to come up with a number. What do we do when properties are different from the rest of the neighborhood? Let’s kick around some ideas below. I’d love to hear your take in the comments too.
Here’s what I tend to say for how to pull comps on tricky properties:
- Deep Research: If a property is challenging, how far back in time have you looked? Sometimes we say things like, “I’ve scoured everything,” when in fact we’ve only glanced the past 3 to 6 months of sales. If we are dealing with something funky, we might have to look at years worth of sales to find something similar. Finding older similar sales is important because it helps us see how a challenging property fit into the local market. You can thus use older sales for research or include them in a report or CMA (and make an adjustment up or down depending on how the market has moved).
- Previous Subject Sale: Has the subject property sold before? If so, what did the subject compare to at the time? Finding comps for prior sales might be a clue into how the subject property fits into the context of the market. Of course it’s important to remember the previous sale might have closed too high or low.
- That One Feature: Often a home might be fairly standard, but what makes it difficult to value is an extra feature that is less common for the neighborhood. Maybe it’s a huge barn, accessory dwelling, or a studio above a garage. This is where we have to try to find something that is similar enough so we can gauge what the market has actually paid for that feature (since the cost of the feature might be way more than the actual value it adds). Remember, we might not be able to find something exactly the same, so we’ll have to be okay with similar, which is alright as long as we are looking at two things that are truly competitive. As an example, we might be able to find four neighborhood sales with accessory dwellings over the past couple of years and then compare those sales with otherwise similar homes (but without an accessory unit). As we start to compare prices, we can try to extract a percentage or dollar amount for what the accessory unit contributed to the overall sale, and then apply that in today’s market.
- Competitive Areas: If sales are extremely sparse in the subject neighborhood, where else would a buyer consider purchasing? You might try looking there for recent sales. Make sure the neighborhoods really are competitive though, and the way you’ll know that is if prices have been similar over time in both areas.
- Bottom & Top: Sometimes when dealing with a really funky property, we have to ask ourselves where the top and bottom of the price market is in the neighborhood. At the least this gives us some context for where the value of the subject property is likely to fit (I know, that might be a wide range, but it’s better than nothing).
- Ask for Advice: One of the best things to do when valuing a tricky property is to ask for advice. Seek out others who have valued something like that before and ask for wisdom. What did you do? Who did you talk to? Where did you go for comps? What challenges did you face?
- Target Buyer: It’s often useful to consider who a target buyer might be so we can gauge how that representative buyer might approach the property.
- Range of Value: When a property is out-of-the-ordinary, it’s useful to see value in a range. We like to be so precise about value, but the best thing we can do at times is to give a range of value based on research. Thus instead of saying, “The value is $550,000 exactly”, we might say “A reasonable value range is $530,000 to $560,000”. This can work well for agents to communicate value for a unique home, but it can also work well with appraisers for doing certain types of private appraisals or consulting work where a precise value is not needed (a lender is going to want an appraiser to select a specific value).
- Test the Market: You can do all your homework on a property and still not be sure the value is where you think it is. Sometimes when a property is unique, it’s good to go in with research or maybe even hire an appraiser, but at some point the property needs to be exposed to the market. After all, the market will tell you what it’s worth.
- Walk Away: On occasion the best thing to do is walk away from a property. Appraisers get this because we know we are not 100% qualified to value all properties. For example, I am not qualified to appraise the Capitol building in Sacramento, sports arenas, The White House, or a few hundred acres of almond groves in the Central Valley (not at this time anyway). Recognizing our limitations keeps us humble and it’s key for building credibility with clients. This also underscores how the best answer to value can sometimes be, “I do not know what it is worth. I have some ideas, but I think we need to test the market.”
I hope this was helpful.
Blogging Class I’m Teaching: I’m teaching a class coming on April 12 at SAR from 9-11am. It’s called “Successful Real Estate Blogging“, and I’ll be talking through the nuts and bolts of effective blogging. This will be extremely practical, and my goal is for you to take action (rather than just listen to me talk shop). I’d love for you to be there. See the attached image for more info. Let me know if you have questions.
Questions: Anything else to add? Did I miss something? I’d love to hear your take.