It doesn’t matter if you are buying a house to keep as a rental, to live in, or flip. Getting a great deal provides you with many exit options if the market goes down or if you discover that this is not the right rental for you.
Learning how to determine property values gives you the confidence to act when you see a good deal.
This is an easy skill to learn if you know the basics.
It’s helpful if you have access to the MLS but if you don’t you can use free sites like Zillow and Redfin.
Here is how to do a Comparable Market Analysis (CMA) using Redfin:
- Find at least three comparable properties. These properties need to be identical or similar. For example, if the subject property is one story, concrete block construction, compare it only to other one-story, concrete block homes.
- Compare apples to apples. Try to find comparable properties that are good substitutes for the subject property. Would a buyer choose a comparable property if the home you are evaluating is not available?
- Chose recent sales, homes that were sold within 3 mos. If you can find similar properties sold within 90 days, extend the timeframe to 6 mos.
- Location – Start your search for comparable properties in the same neighborhood. If there are no recent sales, search within 1 mile. In suburban areas, you can extend the search to 5-mile radius, for rural homes you may look beyond the 5-miles.
- Size of the properties- Chose comparable properties that are 300 sq.ft. smaller or larger. The price per square foot for larger homes is always cheaper. This is the reason why calculating value by multiplying it by price per sq foot doesn’t work.
- Age – 5-year newer or older of the subject property
- Similar architecture and construction
- If possible compare properties with the same amenities, for example only homes with pools or without pools.
What if you can’t find recently sold homes that are identical or similar?
You have to adjust for the extra amenity, rooms, or whatever is extra or lacking.
Here is a video on how to determine property values using Redfin and our CMA excel sheet.
This excel sheet does all the price adjustments for you but I will also show you how it works.
Using Redfin, start by entering the address of the subject property.
Next, go to the neighborhood click on the neighborhood name or zip code. Go to filter properties and activate sold and deactivate active.
Picking the right comparable properties is the most important part of this process.
Compare apples with apples. If a buyer was looking for a property similar to the subject property, will he or she look at the comparable properties as well?
After you enter all information in the CMA excel sheet, you will get an estimated value.
How to adjust for differences in features or square footage
If you want to evaluate the properties without using the CMA sheet, for each comparable property that has something extra, like a pool, you have to adjust by subtracting from the sales price, and if the comparable property is missing something like a pool you have to adjust by adding to the sales price of the comparable.
Of course, you should do your best to find homes that are similar but if you can’t you need to adjust for features that are extra or lacking.
You always do the adjustments on the comparable properties not on the subject property.
Here is an example:
|Example||Subject Property||Comparable Property 1||Comparable Property 2||Comparable Property 3|
|Number of Rooms||5||5||5||6 |
(Minus $6000 because the comparable has one extra room)
|Square Footage||1200||1200||1400 (Minus $25000 for the extra sq.ft.)||1200|
|Pool||No Pool||Yes ( Minus $20,000 for the pool)||No Pool||No Pool|
How do you know how much pool or extra footage adds to the price?
You can look at sales of identical properties, with pool and without, the price difference is the value buyers place on having a pool.
Extra square footage is easier to adjust for, just multiply the extra sq.footage by the average price per sq. ft.
Transcript from our Q&A Livestream answering more questions on this topic
Here is the video
Are Zillow and Redfin estimates accurate?
You can rely on Redfin and Zillow estimates to a certain degree in areas where the housing stock is similar. If the homes are older different construction and levels of upgrades, their estimates are not very accurate.
How much does a pool add to the value of a home?
It depends, in Florida, pools are highly desirable and can add $15,000 to $20,000 to the value of the home even to the rental prices.
In other areas of the country that may not be the case.
The proper way to determine how much value a pool adds is to look at comparable properties with and without a pool and determine how much more buyers pay for a pool.
What is I have two buildings on the lot?
You need to find comparable properties, another property with two buildings recently sold.
Can I use this CMA excel sheet for multifamily properties?
There are three ways to evaluate real estate, comparison approach, cost approach, and income capitalization approach.
Multifamily properties use the income cap approach. Our CMA excel sheet is designed for the comparable approach.
I am looking for a property in Tampa with a separate mother in law building but I can’t find any recent sales.
An easy way to think about this is to put yourself in the shoes of a buyer who is looking to buy a house with an accessory unit.
Start your search in the same neighborhood or a, if you can’t find anything look for older sales and adjust for time.
If you know that the homes in the neighborhood are appreciated by 3%, adjust for that.
If it’s a unique property and it was sold fairly recently, you can use that as a guide.
Finally, look in nearby neighborhoods with similar characteristics.
How accurate are the property values on the county appraiser’s website? Any idea?
The values you see on the county appraiser’s website are the assessed values. In most cases are much lower than market values. I have no idea why.
I read about the importance of knowing your market, but what is the best way to stay on top of this?? Is this something you check on weekly?
Great question! As an investor, you have to keep your finger in the pulse of the market. How?
Sign up to receive new listings from your realtor, Redfin or Zillow. Ask your realtor to also email you sold and pending listings.
Drive through the neighborhood, if you see a lot of activities investigate why. Network with other investors and wholesalers.
This will become natural as you get into it.
Do you anticipate a drop in property values in 2021?
I wish I can answer this question. I don’t think anyone knows. What you should follow is how many months of inventory. If this number starts to increase steadily, we may be heading for lower prices.
This number is calculated by dividing the active listings and sold listing during the previous month.
If we start to see foreclosures increase, this may increase the supply but I don’t think it will happen in 2021 because the foreclosure process can take at least one year.
I am analyzing properties sometimes the pricing just does not make sense. For example, two houses on the same street within a few blocks of each other, in similar conditions. One is a foreclosure listed for 160,000, another is a regular sale listed for $155,000.
Right now the market is so short on inventory, in some areas one month, that all homes sell at the same price even if they are bank-owned properties.
It’s possible that the regular sale is actually a distressed sale, maybe the seller has to sell fast.
I was surprised to learn how large is the market for sellers who want to sell fast at a lower price. It’s estimated to be 30%.
If you are a wholesaler or fix and flip investors that’s good news.