How much is my property worth? It's a question every homeowner and real estate investor asks and it's not a simple answer. In this video, we're going to dispel some of the myths about determining what a property is worth and give you some tips from the real world, so you can arrive at a value the market will pay. It’s one of the most valuable skills that we teach our apprentices, and it can either make you a fortune or bring you to financial ruin!
How Much is My Property Worth?
In today's technological age with endless resources available, determining what a property is worth should be easy, right? Unfortunately, it's not. Despite all the experts and resources, there’s a lot more to determining what a property is worth than meets the eye. Yet, understanding what a property is truly worth is one of the most important and fundamental skills you can ever acquire in real estate. So, where do you begin?
Option #1: Online
Most people these days start online. You can go to Zillow, Redfin, Trulia, or even Realtor.com and you should be able to get a number, right? Yes, but wait, why don't they all match? Although these online platforms offer quick estimates, the challenge is that these estimates vary. For instance, type in an address and you'll get varying results. A property in Palm Coast, Florida that sold for $800,000 last year was given four different values:
Zillow: $799,500
Realtor: $847,000
Redfin: $941,000
Trulia: $800,000
That's a $142,000 swing in value! Clearly, if value was objective, there wouldn't be this much variance.
Option #2: Artificial Intelligence
What about AI? Won’t the power of artificial intelligence make valuing a property more objective? Well, the biggest challenge for AI is when a property is unique. Not every property is in a cookie-cutter neighborhood with dozens to compare to. There are lots of property variables that AI won’t know:
- Odd layouts
- Overly customized finishes
- Being overbuilt for the neighborhood
- Drawbacks to the location (train tracks, power lines, bus stop)
- The direction the property faces
- 2 bedrooms instead of a 3
- The quality of the school district
There are so many nuances with properties that are considered outliers that AI unfortunately doesn’t know. To dive into more of the unique outliers that make it harder to value a property, and can cost you money, Devin has a great video: 10 Hidden Factors That Can Destroy Your Property Value
Option #3: Tax Assessment
Now what if we go to the tax assessment for the property? Many assume that since the government taxes you on this value annually, it must be accurate and reliable. Typically, that's not the case. Even when labeled as an appraised or market value, tax assessments are the result of a formula applied to an area, often adjusted annually or every few years. The tax value is hardly updated to reflect the current condition or unique features of individual properties. And if you think it’s too high, you protest your taxes!
But realistically, there are a lot of homeowners that get that notification of a higher assessed value and have no idea it may be well over the amount they could sell for. So, instead of protesting, they’re going to dinner to celebrate! Obviously, the government wants to collect as much in taxes as possible, so there’s no incentive for them NOT to assign a higher value, therefore you can’t rely on the tax valuation.
Option #4: Real Estate Agents
Besides online resources, many prudent buyers and sellers consult a real estate agent. Experienced real estate agents often provide a Comparative Market Analysis (CMA) to help homeowners understand their property's worth. The CMA uses comparable data from the Multiple Listing Service (MLS), which is a local database of all properties, both for sale, and that have sold, and participating agents and appraisers have exclusive access to that information. It’s really the coveted data that is most heavily relied on in valuing property.
While this method is generally more reliable, it's not without its flaws. Contacting an agent with that access certainly makes sense, but keep in mind you’re dealing with a salesperson that wants your business, and the accuracy of a CMA largely depends on the agent's experience and knowledge of the local market.
- Did the agent visit the property?
- Do they know the area, the build construction, the current condition, and the neighborhood specifically?
All those pieces will impact arriving at a reasonable range of value, much less a very accurate number. And again, as a salesperson, the agent may lean toward the higher side of the range to encourage the client’s business.
For example, I had an agent on one of my first investment properties tell me it should sell at $90,000 once it was fixed up. Now note, she didn’t participate in the local MLS, she was old school, and just knew the area and active there for decades. I rehabbed the property as recommended, but when it came time to sell, the most I could get for the property was just $70,000. And as you probably guessed, the agent wasn’t there offering to make up the $20,000 difference!
So be sure to scrutinize any CMA you receive from an agent. Really probe into their assumptions, as well as their experience with the local area, not to mention their success there. Great agents have a track record of success that they’re proud of, and they certainly know their own sales stats, and don’t mind sharing them.
- How many properties did they sell last month, last quarter, in the last year?
- What percentage of initial list price do they get their clients?
- What is their average Days on Market (DOM) before a contract?
Ask these kinds of questions, and if the agent is a deer in headlights, you should take that into consideration in relying on the information they’re presenting you.
Option #5: Appraiser
Outside an agent, buyers and sellers go to an appraiser. An appraiser is a licensed professional that is paid to determine the market value of a property using market data in comparison to the subject property. They use similar data to real estate agents but are hired to provide an independent assessment. Their data comes almost exclusively from the MLS, using Comparable Sales (Comps) from around the property to arrive at a value by sales comparison. Note, they can be hired directly if an owner or buyer is seeking to understand value, but when a mortgage loan is involved, the lender works through an independent third party called an Appraisal Management Company (AMC), to ensure there’s no influence by lenders on the appraisal.
Opinion of Value
Parameters: Keep in mind, an appraisal is an opinion of value, and is very much influenced by requirements of the AMC. For example, if an AMC directed that comps should be no more than 3 or 6 months old, but could go out as far in distance as needed to identify like-kind sales, as opposed to setting a limitation that constricted distance to a quarter mile, or within the subdivision, but allowed for sales much further back in time, you can see how an appraiser’s valuation may well differ with that of another appraiser, simply based on the comps they were able to use.
Bias: There is also a bias to be considered when the appraiser knows the price on the contract, which they always do. And of course, there’s typically pressure from all parties involved for the property to appraise, so it’s not exactly a totally blind, objective valuation. For more on appraisals, check out Phil’s video on our YouTube channel: 3 Myths of Real Estate Appraisals
Again, the appraisal is an opinion of value, albeit a very educated one. The better your appraiser knows the area, and the more factual data they have, both about the property and the comps available, the more accurate their estimate can be. That said, the older and more unique a property is, especially in an area with limited sales activity, the more variables an appraiser must take into consideration.
We had an apprentice sell a property recently that appraised at $150, 000, when the highest the market would bring was just $92,000. He still made a decent profit, but it sure is tough to take an offer at a much lower value after months on the market, when you have a much higher appraisal in hand! So, keep in mind that an appraisal is still an opinion, and different appraisers can arrive at different values based on the data they choose to use.
Steps to Accurately Value a Property
As you can see, there’s a lot more to determining what a property is worth than meets the eye! And if you’re trying to make tough decisions, like whether to sell or whether to pursue an investment property, or whether you should make improvements to your property and what it would sell for once you do, this skill will make all the difference. So how do you do it?
Get the Right Data
You start by getting the right data. As we covered, there’s no shortage of data available online, and AI brings a whole new level of potential. But again, despite the powerful tools available, aggregating and processing tons of data from a myriad of resources, keep in mind that accuracy is critical, and that’s even harder if you’re in a non-disclosure state.
We need data quality more than data quantity. And since most buyers need loans, and the banks that provide those loans rely on appraisals, and appraisers rely on data from the MLS; hands down, you MUST have access to the actual MLS data. If you’re not using direct MLS Comps, it would be like not having glasses, and you're always going be unclear and groping in the dark. There are very few workarounds available; and we have some for our apprentices, but do NOT underestimate this step.
Account for Unique Outliers
Next, you must account for any outliers, anything and everything unique about the property. These are all noted in the appraisal, and you need to know how to make proper adjustments accordingly:
- Location
- Size
- Age
- Any functional obsolescence
- Current condition
- Neighborhood
- Demographics
- Employment
- Crime
- Quality of the school district
We have an apprentice in Wisconsin that just sold a property he renovated that didn’t have a basement. That factor alone accounted for a $40,000 difference in what he could get for the property otherwise. Another apprentice in Missouri sold a property earlier this year that lacked any covered parking. The only option was parking at the curb in the front, and then climbing steep steps and there was no rear access remedy. That’s not an easy to quantify adjustment, because it’s an X factor: some buyers really want to protect their car, or just not get wet when it rains! Which means your pool of buyers goes down, and that introduces a much bigger challenge in selling a property.
Estimate What the Market Will Pay
Finally, you must narrow in on the right comps, account for unique outliers, and make adjustments to accurately estimate what the market will pay for your property. This includes analyzing comparable sales, evaluating the active competition, and deciding whether to sell as-is or make improvements. This is the hardest part to master.
At the end of the day, your property is worth what competing buyers in the market are willing to pay, typically supported by the comparable sales an appraiser is willing to use. You can see, this is more an art than it is a science, but again, it’s a skill you must master to achieve consistent success in real estate. Getting this wrong can cost you tens of thousands of dollars. Phil has a classic video that’s phenomenal on this subject: Determining Property Value the Right Way. I highly recommend you watch it to learn more.
Key to Your Success
Hopefully it’s becoming clear: there’s a lot more to determining what a property is worth than meets the eye. It’s a critical skill that’s fundamental to your success – great investors master it, and they thrive. But the majority of people will struggle with it, and it's one of the main reasons why they won’t be as successful in real estate as they should be.
Anyone can find lots of data online.
There’s no shortage of real estate agents in your market with MLS comps.
And you can all certainly hire an appraiser.
But no matter who you bring in, until those people have made their money from reselling properties that they bought with their own money, all that expert advice could be worthless! What truly matters is the people who have had to stick their neck out and put their money where their mouth is as a real estate investor. They must be able to accurately determine what the property's worth, make all their calculations, and buy it at the right price so they can fix it up and resell it for a profit.
Every Successful Real Estate Investor Has a Mentor
AI can’t solve this! It’s a complicated subject, and it’s why you need a mentor! We work with our apprentices every day to understand what properties are worth, and what they will sell for, to complete successful, profitable house flips. If you want the very best in the industry helping you determine what your property is worth, so that you ensure you always make a great profit, consider our Apprentice Program, where Phil, Devin, myself and the rest of our team will mentor, coach and guide you to consistent success: Freedom Mentor Apprentice Program.
If you have questions for us, text FREEDOM to 305-315-8030 or post a comment below.
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