How do you know what a larger home is worth if the only recent sales are much smaller in size? A friend asked me this question recently as she was trying to price a listing. There are a few things I do when in this situation, and since this conversation helped my friend, I figured it might be useful here too (she said it was okay to turn this into a blog post).
Question: I can find properties that are great comps, except for square footage. The property I am trying to value is 1730 square feet. All the others are less than 1200. Is there some kind of formula you use to make up for the difference?
Answer: I only wish there was a formula so I could hire a computer to write all my reports and make adjustments for me. In this case the first thing I wonder about is why this house is 1730 sq ft in the middle of 1200 sq ft homes. Is the square footage legitimate? Or are we talking about a lower-quality add-on or garage conversion? Or maybe there simply haven’t been any larger sales that have sold recently.
- Immediate Neighborhood: The first place I would start would be to look at older sales in the immediate neighborhood. I would go back in time as far as needed to see what properties around 1730 square feet have sold for. This would help me gauge the market and begin to get some sort of a price point to understand what buyers have been willing to pay for larger-sized homes. I probably wouldn’t use these “oldies” as comps in my appraisal report, but they are still valuable to help paint a price context.
- Price Percentage Differences: When finding older sales I would look at how much of a price difference there has been between larger homes around 1730 sq ft sales and 1200 sq ft sales. If I can extract some sort of a percentage difference based on those sales, I might be able to apply that percentage adjustment to any 1200 sq ft sales today.
- Competitive Neighborhoods: Lastly, after gleaning a better understanding of trends in the immediate neighborhood, I would probably branch out to find some larger-sized comps from competitive neighborhoods.
Question: Any insight, additional points or questions? I’d love to hear your take in the comments below.