Financial Freedom Group Blog: How to Determine the Value of Property

It can be nearly impossible to pinpoint the exact price that a property is worth. No two properties are exactly the same. They may have similar features and may even be in the same building but they are different.

I run into many people that will tell me that the appraised value is __________ or the tax assessed value is __________ and they will hold that value as fact. The true value of a property is what someone will pay for it, nothing more. An appraisal will try to take into consideration comparable properties but I have seen two appraisers be off $150,000 on a property that was apparently worth between $310,000 and $460,000. That is an increase in value of over 48% over the lower number.

The best way to get an idea of what a property is worth is to find comparable properties that have sold in the area with in a reasonable time frame.

What is a comparable property? There are a few main factors to compare as well as some minor issues. The main factors are the number of bedrooms and bathrooms in the property, the finished, above ground square footage, and the year built. The minor issues are the amenities and finishes of the property. A brick exterior is more valuable than siding, granite counter tops more valuable than Formica, etc.

What is an appropriate area of comparable properties to compare? To figure out the area that the property is in you should look for properties that are in similar locations. One block might be the difference between school districts or cities and that can have a tremendous impact on the value. On the other hand a neighborhood may go on for miles and homes may sell for similar prices throughout the neighborhood. A general rule of thumb is within one mile of the property is considered the same area but other factors may change that dramatically.

What is a reasonable timeframe from when the comparable property sold? It depends on the market. In general within one year is a good rule of thumb. You want to use the shortest time period possible for a comparable property because the market could be changing. If the market is increasing dramatically you should use a shorter time frame. The same is true if the market is declining in value.

A great comp, as comparable properties are called, would have been sold within 1 month, have the same number of bedrooms and bathrooms, be the same style house, have similar finishes and be on the same block. If you can find three properties that have similar qualities, take the average of these three properties and you should have a good idea of what your property is worth.

A real estate agent can be a great resource for helping you determine the value of your property. They will usually do this for free in hopes of getting the listing on the property. I would recommend getting three different real estate agents to come out to help you determine the value. Personally look over the properties that they use as comparables and verify that they are indeed comparable. Occasionally real estate agents will give you a high value in hopes of getting the listing so be aware of that.

Eventually as you are in the game longer you will know what the market is doing and what a property will fetch on the market.

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