Real Estate Ramblings
By Walt Hennessee, Owner/Broker of Zeriss Realty, LLC, Real Estate Instructor, Certified Distance Education Instructor.
“Location, Location, Location.” You have heard this many times when referring to the value of property. This principle applies to residential properties and I am going to make an effort to explain the concept of location and how it affects the value of a home.
The first thing I need to do is explain how a CMA is used to estimate the market value of a property. CMA is short for Comparative Market Analysis. This will give the Realtor, and the home owner, an indication of what the market is actually paying for homes nearby that are similar to the one we are concerned with. In most cases, nearby is defined by the subdivision the home is located in. The reason for this is that most of the homes in a subdivision were built about the same time, with the same covenants and restrictions, and in most cases, constructed by the same builder. It should be noted that neither the homeowner, the Realtor or even the appraiser sets the price for what a property will sell for. A property is only worth what someone is willing to pay for it.
We first set up the subject property and then find what comparable properties to the subject have sold for within the past year or two. The closer the sales are to the current date, the better the numbers are for analysis. We try to find at least 3 comparable properties to come up with the price per square foot the market is paying for properties that are similar to ours. Once we have these three numbers in price per square foot, we add them all together, and divide by three to come up with the average price per square foot. This average will then be multiplied by the square footage of the subject property, and this gives an indication of the market value of the property. This is very similar to what an appraiser does, only he will go into more depth with the analysis, however, it should be very close.
For demonstration purposes, we are going to consider an imaginary 2,000 square foot all brick rancher (one story) that has 3 bedrooms, 2 baths, and an attached 2 car garage. The comparable homes we select should not be foreclosures, short sales, “as is”, or distressed sales of any kind, unless they are the only ones available to compare to. The ones we consider should have been sold under “normal” market conditions. Our imaginary home will be placed in three actual subdivisions in Huntsville, and we will see how the value of this home changes dramatically, depending on where it is located. Nothing will change except where the subject property is located. I am not going to indicate where the subdivisions are located, only that they are in south, middle and north Huntsville.
The first subdivision we will consider is located in south Huntsville. We found 3 properties that were very comparable to our imaginary home. The average price per square foot (psf) worked out to be $76. Multiplying $76 times the 2,000 square feet (sf) gives us a market value of $152,000. This is the estimated price we would expect the home to sell for. Incidentally, this is very close to what an appraiser will assign a value to as well.
The next subdivision is located in a very desirable part of the city and the price per square foot for homes that are comparable to our example home is $133 psf. Once again, multiplying this by our 2,000 sf subject property, results in an expected sales value of $266,000.
Finally, in a subdivision in north Huntsville, it is difficult to find properties that are not distress sales. Most are foreclosures or “as is” properties. This is what is referred to as the “new normal” sales condition for this area. The average price per square foot works out to be $31. The math works out to an expected sales price value of $62,000.
It is remarkable that the same 2,000 sf rancher varies in price from $62,000 to $152,000 to $266,000 and the only variable is where it is located. That is over a two hundred thousand dollar variance.
This value difference can also exist in subdivisions that are in the same proximity. If a community has a very active and engaged group of homeowners that meet regularly to address issues, the values seem to be higher than those that just “exist.” The pride of ownership shows in these areas and is reflected in higher property values.