Chapter 3 Section 2: Real Estate Appraisal: Pricing Property

You can obtain additional information from other sources, although compiling the data from those sources will take more time than an MLS download. Other sources for obtaining information include:

-Company records from the licensee's own firm -Other brokers -Local Board of REALTORS® -County records -Appraisers -Title companies -Licensee's own experience over time

Parking facilities

-Is there an enclosed garage, how many cars does it hold? -Is the garage space large enough for storage or a workshop? -is there a doorway directly leading from the garage to the living area

In the process of choosing comparables, you will need to consult various sources of information. The information a licensee needs includes:

-Market data, including the listing and selling prices of the homes in the neighborhood. -Financing terms of the sold transactions. -Physical aspects of the properties.

***There are some additional aspects of a property site that a licensee should consider when collecting information about a seller's property for analysis

-Shape -Landscape -Position and orientation -Title considerations

***With expired listings, you should remember to:

-Show the seller the expired data. Most often a property fails to sell because of overpricing. Expired data may show the seller that the asking prices of these homes were significantly higher than the selling prices fo the homes on the recently sold list

***You should have at least three already sold properties in your comparable:

-Similar properties that have sold within the past three to six months. The more recent the sale, the more reliable the data

***For recently sold property comparables, you should be concerned with:

-The date of the sale -Financing terms Sale conditions

A licensee will take the following steps when getting ready to do a CMA:

1. Collect and analyze information about the seller's property 2. Choose comparable properties in the area 3. Compare the seller's property to the comparable and adjust to the value of the comparable 4. Estimate a reasonable and realistic selling price for the seller's property

When doing a CMA, what is the minimum number of sold properties that should be included?

3

What is an example of a pitfall of overpricing?

A home failing to sell and becoming an expired listing

***Position and Orientation

Access the features of the site as it relates to such things as view, amount of sun or shade it receives daily, proximity to traffic noise, and the amount of shelter it receives or does receive from the elements

Working with Comparables Example

Agent Jim has found comparable properties in the same neighborhood as his seller's property. Almost all the factors are the same except that the comparable has three full bathrooms and the seller's home has two full baths. The comparable sold for $250,000. Since the comparable has a feature that the seller's home does not have, Jim will need to adjust the sales price of the comparable downward to make up for the difference. But how does Jim know how much to adjust the price?

Home Size

Determine the square footage of the home's living area, not including attached garages, unfinished basements or porches. Most often, living area must be "under heat and air conditioning"

***Shape

Assess whether the lot is a rectangle, a square, or some irregular shape. Standard shapes are usually perceived to be more valuable than irregular lots bc of their adaptability

***Financing trends

Available money in the real estate market constantly changes? Is money tight? Or is money flowing freely?

Step 4: Estimate a reasonable and realistic selling price for the seller's property

Before the licensee comes up with an estimate, they need to evaluate the soundness of each comparable. The most reliable comparables would be those that are the most similar to the seller's property - in this case, most similar means the fewest number of adjustments.

Interior home design

Check out the floor plan to see if it is efficient and convenient. Also note, if the layout is attractive. Not any design flaws that could contribute to a lessening of the home's value.

Recently sold

Comparable propertjes that have recently sold are probably the best predictor of the market value of the seller's property. Since the transactions have closed and the seller have received his or her cash, it is safe to assume that the selling price was arrived at mutually by a willing seller and a willing buyer

A licensee has a listing with very close matching pending sale comparable. Using the comparable what should a licensee do to see if they have a good price for the listing?

Contact the listing agent on the pending sale for price and sale information

Total number of bedrooms

Count the number of bedrooms in the home. Bedrooms add substantial value to a home. If all other home features are identical, a three bedroom home would be worth much less than a four bedroom home

Total number of bathrooms

Count the number of full baths, three quarter baths, and half baths. A full bath has a sink, toilet, and tub and may or may not have a shower. A three quarter bath has a sink, toilet, and shower with no bathtub. A half bath has only a sink and toilet

Total number of rooms

Count the number of rooms in the home, not including the bathrooms or any rooms in the basement

For recently sold properties, the licensee should also be concerned with what?

Date of the sale Financing Terms Sale Conditions

Sale conditions

Deals with the motivations the buyer and seller may have had when completing the transaction.

Air conditioning

Determine if the home is air conditioned and if so whether its central air or window units. Air conditioning adds value to a home and since most areas of the country have at least some hot weather, most buyers consider it essential

Quality of construction

Document the types of materials used in the construction of each of the buildings and assess the quality as good, fair, or poor

To what home features do extra insulation, double- or triple-paned windows or hot water heaters refer?

Energy efficiency

What is the last step in completing a CMA?

Estimate a reasonable and realistic selling price for the seller's property.

Age

Find out the age of the structures and decide if the condition makes the property look older or younger than its actual age

Energy efficiency

Find out what energy saving features the home may have. This includes extra insulation, double or triple paned windows, and energy efficient appliances such as hot water heaters, dishwashers and heat pumps

Where can a licensee find most of the information they need to do a good analysis?

From the multiple listing service (MLS)

***Landscape

Gently rolling land is usually preferable to flat or hilly sites. However, if the site is a vacant lot and it would incur higher development costs because of the terrain, the value of the lot would decrease

Pending sales

Homes who offers have been accepted by the sellers, but the sales haven't closed and the titles have not transferred. Sales normally remain in the pending stage for 30-60 days

When completing the CMA a licensee has a comparable that has a feature the seller's property does NOT have, for example an extra bedroom, what adjustment must be made on the comparable?

If a comparable has a feature that the seller's property does not have, subtract the value of that feature from the price of the comparable

Basement

If the home has a basement, find out if it's finished or unfinished. A finished basement adds value to a home, but usually not enough value to recover the cost of having made the improvement

Sale Conditions Example

Mike has a home for sale and finds another property he is interested in purchasing. He cannot make the purchase until he sells his current home. Mike's mother agrees to purchase Mike's home as an investment, so that Mike will be able to purchase the new property. Mike sells the home to his mother for $25,000 less than the listing price. In this situation, the price paid for the home is not an accurate reflection of the home's true market value. Mike and his mother entered into a transaction under circumstances that do not usually affect the market. A licensee should avoid using non-arm's-length transaction sales as comparables, since they are unreliable as indicators of value.

Establishing a Home's Value factors:

Location Property Condition Financing trends Improvements -Supply and demand

***Title considerations

Observe the site for any evidence of easements or encroachments that could impact the title. Properties that have existing easements could be viewed as less desirable or valuable than a similar property with no easements

***Step 3: Compare the seller's property to the comparables and do some adjusting to the value of the comparables

Once you have chosen comparable properties in each category—sold, pending, active and expired—you will be able to compare each of them to the seller's property. You should make the comparison based on location, physical characteristics, sale date, and financing terms. Since you have already eliminated any non-arm's length transactions you may have encountered, the sale conditions have already been accounted for. Now you will use the differences in the above factors to make small adjustments in either the sale price or the listing price of the comparables. Remember, you will always be making adjustments to the comparables. Never try to make any adjustments to the perceived value of the seller's property.

What information is not necessary for a licensee to collect about the neighborhood in which a seller's property is located?

Population

Date of the sale

Sale dates should be within the last three to six months. Any sale older than one year should not be used. Market conditions change too rapidly for data that old to be very useful. If a licensee has difficulty locating comps less than six months old, and needs to rely on data from a sale that took place six months to one year ago, they might have to do some adjusting to account for the time difference.

If a licensee has prepared a CMA, they make a comparison based on location, physical characteristics sale date, and financing terms. The licensee will use the differences in these factors to make small adjustments to what?

Sale price or the listing price

Cash Equivalent Sale Example

Seller Tom listed his home for $145,000. Seller Tom and buyer John negotiate an initial contract of $142,000 for the home. John doesn't have enough money to pay the $5,000 in closing costs. So John and Tom agree that John will purchase the home for $148,000 and Tom will pay John's $5,000 closing costs. In this scenario, the closing cost agreement has affected the sales price of the home.

Active listings

Sellers are always in treated in mowing how much comparable homes are listed for in their area. Although you need to present this information, it should include sound advice. Sellers need help in keeping their expectations realistic

What aspects of a property site should a licensee consider when collecting information about a seller's property for analysis?

Shape Landscape Position and Orientation

What are the most reliable comparable to collect for a CMA?

Sold homes that are most similar to the seller's property

Step 2. Choose comparable properties in the area

The licensee will choose those comparable properties: -Recently sold -Pending sales -Active listings -Expired listings

***A licensee should keep in mind that the information on pending sales is not as reliable as a sold home because

The price the licensee sees on the pending home is the listing price, not the final sale price. The definite sale price of the home won't become available to the licensee until the sale actually completes. The sale price could even be lower or higher than the listing price

Why should a licensee keep in mind that the information on pending sales in not as reliable as on sold homes?

The sale price could even be lower or higher than the listing price

When an appraiser is looking for comparable that have recently sold, they should look at similar properties that have sold within the last how many months?

Three to Six months

Cash equivalent Sale

When a buyer uses a conventional loan to purchase a property. -Have no effect on the price the buyer paid for the property

***Estimating Values

When an estimated value for specific home features has been determined, the value will either be added or subtracted from the sale or listing price of the comparables. If a comparable lacks a feature that the seller's property has—for example, the comparable has one less bathroom than the seller's property—the licensee will add the value of the feature to the price of the comparable. If a comparable has a feature that the seller's property does not have—for example, an extra bedroom—the licensee will subtract the value of that feature from the price of the comparable.

Step 1: Collect and Analyze information about the seller's property

When collecting information about the seller's property for analysis, you should focus on: -The neighborhood -The home site -Existing property improvements

***Location

You've heard the phrase "Location, Location, Location". Where a home is located might be the single most important aspect in determining its value. A home with a view of the city, for instance, is worth more than a home facing a cement wall. Homes located on a busy street are worth noticeably less than homes on quiet streets

Appraisal

an opinion or estimate of value performed by a licensed appraiser

Expired listings

homes comparable to the seller's home that ultimately did not sell. These homes are at the opposite end of the spectrum from the homes that sold

Comparative Market Analysis

or CMA, is similar to an appraisal, but it is done by a listing agent to give the seller an idea of the sales prices of similar homes in the area. This information helps the seller decide how much to ask for their property. A CMA is less reliable than an appraisal

***If a pending comparable is a very close match to the home you are trying to list, you can contract the listing agent for the pending sale and see if the agent is willing to let you know if the home sold close to the asking price. The agent cannot give out:

the actual final price because that would be a violation of the agent's fiduciary duty to the seller, but the agent might be able to give enough general information to be helpful

Principle of substitution

which says that a buyer won't pay more for a property than they would pay for a property that is similar in characteristics and amenities