6-steps to determining the value of real estate

Filed as: Updates 
Posted on: Monday, November 19th, 2007

What’s the property really worth?  In changing markets it is often difficult to determine the true market value of a property.  However, no matter the market, there are six steps that will greatly simplify the process of determining the value of real estate.  The six steps are: determine the county’s estimated market value; determine the value of comparable sold properties; determine the competition; know the history of the real estate value – but don’t count on it; talk to a local REALTOR; and set the correct price from the beginning.  Below is an in-depth look at each of the six steps.

Determine the county’s estimated market value
This is one of the first places to start when determining the value of real estate.  Each year, the county assessor sets an estimated market value of real estate in the county.  This value is provided to real estate owners several times a year.  In the fall, real estate owners receive a notice of valuation for the upcoming tax year – this provides next year’s estimated market value.  In the spring, real estate owners receive tax statements for the current year – this provides the current year’s estimated market value.  The information is also available online from most counties or by contacting the county assessor.

It is important to remember some things about how the county determines the value of real estate.  Assessors do not review every property each year.  In fact, it is often several years before an assessor does a site visit to a property.  Rather they use sold properties to determine averages for different types of real estate.  For example, wooded land is worth x per acre, agricultural land is worth x per acre, homes are worth x per finished square foot and x per unfinished square foot, garages are worth x per finished square foot and x per unfinished square foot, and so forth.  For each property there are often several valuations that are added together to determine the estimated market value of the property.  It is important to remember the estimated market value from the assessor’s office is a mathematical calculation and not always based on an actual site visit to your property.  Therefore, it is important to remember that uniqueness, the condition of the real estate and other factors contribute to the actual value.

Because the value of the real estate is based on previously sold real estate, the assessor is always chasing the market.  That is, when the market is hot and prices are accelerating quickly, the estimated market value is generally lower than the actual value of your real estate.  When the market is cooling, the estimated market value is generally higher than the actual value of your real estate.

Determine the sold prices of comparable real estate
What has similar real estate in the neighborhood sold for recently?  There is not likely exactly comparable real estate against which to compare.  Therefore, break the real estate down into easily comparable parcels.  For example, farm real estate may have wooded property, tillable farm ground, and a set of buildings.  Compare what other wooded property in the area has recently sold for per acre and apply that average to your wooded real estate.  Do the same for the tillable farm ground and the buildings.  Add each piece up to get a feel for the total value.  Remember this is just an estimate based on somewhat similar properties.

Determine the competition
Check the local market to determine what other similar real estate is listed for sale and at what price they are listed.  If the subject real estate is older and in need of repair when compared to a similar real estate, the price of the subject real estate will need to be lower than the comparison real estate.  Perhaps the real estate is newer and in better condition than the competition.  In this instance price the real estate at or above the competition.  The law of supply and demand indicates the more of a certain type of real estate there is on the market, the lower the price. 

Know the history of the real estate value – but don’t count on it
It is important to know what real estate was originally bought for prior to it selling now.  However, it is also important to remember that the value the real estate was purchased for was based on a specific market at a specific time.  The market has likely changed – sometimes increasing the value of real estate, and sometimes decreasing the value of real estate.  Over the long run (15+ years), the value of real estate is likely to go up.  Over the short term (less than 15 years), the value of real estate is volatile and likely to go up or down or not change.  Therefore, while it is important to know where the value once was, it should not be used to determine the current value of real estate.

Talk to a local REALTOR
While this step is not necessary, it does help a great deal to talk with a REALTOR familiar with the local market.  This person should be able to discuss market trends, recent sold properties, and the local competition.  It is important to use a local REALTOR as they are most in tune with the local market.  The benefits of a big town/name REALTOR is often outweighed by the knowledge the small town/local REALTOR brings to the table about the local market.

Set the correct price from the beginning
If the price is set too high, the real estate will take longer to sell (waiting for the supply and/or the market to catch up to the asking price).  If the price is set too low, the real estate will sell very quickly and leave money on the table.  Newly listed properties experience most of the activity within the first few weeks of a listing.  Therefore, it’s better to correctly set the price of the home from the beginning than to troll for a high price for few weeks and then drop the price.  In those few weeks, potential buyers have come and gone from the market place and likely will not notice the price reduction because they were priced out of the real estate from the beginning.

Buying or selling – it doesn’t matter
The above steps work equally well for buying or selling real estate.  In order to understand the true value of real estate, a person must take into account all variables about the real estate and the market.  So, whether buying real estate or selling real estate, taking into account each of the above steps will help to correctly understand the true value of the real estate.

We’d love to help
If you’d like to talk with any one of us in our office about the value of your real estate, we’d love to help in any way.  Feel free to contact us.  Thank you.