In these days of the real estate sites like Zillow and Trulia, the marketing and lead generation tools on these sites draw millions of page views every month. What you shouldn't be doing as an investor, home buyer or seller is using the value estimates on these sites to make decisions.
Truly good real estate investors know the valuation of their deals is key to insuring success and protecting projected profits. To effectively determine if a deal is a rental building wealth or flip to make some much needed cash, you have to analyze a deal fully. All the market areas covered by REIAComps, insure you easily know which way an investor should go.
Even Zillow will tell you that they aren't always on the money. They have a chart of median error percentages in estimates in major cities, and they run mostly between around 7% and 9%. That's around $16,000 on a $200,000 house, so you don't want that kind of number in your research for a wholesale or flip deal for sure. Feel free to use a Zestimate for a quick idea of approximate value, but what you want to do to arrive at an accurate market value is what real estate agents do; develop a CMA, Comparative Market Analysis.
The data you need to create an accurate CMA for a home includes:
Recent sold home prices, as close to present time as possible. Three or more similar recently sold homes with as close to the same characteristics as possible matching your subject home. In other words, number of bedrooms, baths, square footage, etc. Some data to adjust the sold price for differences. In other words, how much to add or subtract for a different number of bedrooms, baths, etc.
Now, let's just do an example valuation to get you ready for doing your own. We are considering buying a rental property, and the home has these characteristics:
Comparable Home One
Comparable Home Two
Comparable Home Three
We have our three "comps," so the next step is to adjust our sold prices to make up for the differences in the homes. The necessary adjustments are:
Comparable Home A
No adjustments are necessary for this one. We don't deal with square footage until later, and this home is pretty much identical to our subject property.
Comparable Home B
The differences here are no garage and only two bedrooms. We need to adjust by:
Comparable Home C
We are going the other way with these adjustments:
The question in your mind now is where we got these adjustment numbers. First, remember that we don't want to use remodel or addition costs, as we want to compare like the home had these items either built-in or not at the time the home was constructed. The easiest way for you to get some estimates is to ask an appraiser and/or some real estate agents what they use. It's just an estimate, so don't obsess over it.
Now, we have three comparable homes adjusted to be the same as our subject home, and now we get a sold price per square foot for each.
Comp A: $192,500 / 1790 = $108/square foot
Comp B: $181,200 / 1685 = $108/square foot (coincidence)
Comp C: $190,200 / 1910 = $100/square foot
Now we just average the three to come up with a number to apply to our subject home:
$108 + $108 + $100 = $316
$316 / 3 = $105/square foot
Multiply that by our home size to get the approximate market value:
$105 x 1860 = $195,300 approximate market value
Over the years we have helped many clients using our Online Valuation Support Desk, assisting them to clearly identify true valuations of property. It takes reviewing several deals and the related data to each to determine and build the skills needed to quick know a sure wealth building unit from one which will put five figures in your pocket in less than six months.
Always use REIAComps to determine the best acquisition and ARV for every deal you look at. Don’t for one moment let someone tell you the value of a deal. Let REIAComps show you for yourself. Now you know how it's done, so try it on your own home or an example to get into it.