In Order to Price, One Must First Predict
Dear Property Owners,
The entire real estate world is doing you a disservice.
Sincerely,
Past Sales
The real estate industry is designed in a way that values a home based off of the sale of other homes in the area that are deemed ‘similar.’ Determining what is similar is mostly based on proximity to water, acreage, location, amenities as well as timing. More recent sales are weighted more heavily than older sales. This method, commonly referred to as the ‘Comparable Sale Method’ or ‘COMP,’ is the primary basis upon which home values are estimated.
Unfortunately, when it comes to properties in more rural areas this can be very challenging. In an urban atmosphere there is much more homogeneity; however, in the Bay River region we see a hodgepodge of properties and homes. The question of “Is there off-street parking?” now becomes “Can I dock a boat here?” There are huge variances between properties, and one of the biggest drivers of value is water depth – sometimes even more so than the actual house or dwelling itself. This is why it is so important to have a Bay River expert to guide you through the process!
Using Comps
Assuming the COMPS used are the most appropriate ones available, the equation should go something like this – if Property A sold for $600,000, Property B sold for $525,000 and Property C sold for $550,000, then your property should sell for some average of the three.
The formal appraisal that your bank performs to determine loan conditions uses the same ‘COMP-based’ method, as does the Competitive Market Analysis (or CMA) that a Realtor conducts to determine pricing. The Assessor’s office uses a similar method when it assesses your home for tax purposes (they look at sales in the area) and Trulia and Zillow use a combination of COMPS and assessments to arrive at their (typically incorrect) ‘Zestimate’ of your home’s value.
So is this the best method?
The Future or the Past?
Ask yourself this – Do you drive your car by looking solely in the rear view mirror? The answer is obviously ‘no,’ as most of us tend to focus on what’s happening through the front windshield (at least we hope). We do this because we are focused on where we are going and looking out for potential dangers along the way. We are more concerned with what’s ahead of us than behind us.
Those in the real estate industry have all been consistently trained to look at the COMPS for direction, but it is important to keep in mind that COMPS are events which have taken place in the past.
What happens if the three COMPS you used to price your house in July were from April? Or November? How accurate do you think the estimate would be?
Comps Can Be a Double-Edged Sword
The main problem is this – COMPS are easy to measure and are therefore frequently used. Which is problematic.
Don’t get me wrong, COMPS are a valuable tool. But what you get from the COMP should be seen as a suggestion, rather than a command. The reasons someone else paid some specific amount for some property at some point in the past are a combination of countless complex factors that cannot be easily dissected and analyzed. Inventory levels, interest rates, consumer confidence, seasonality, the ‘Wealth Effect’ created by the DOW and NASDAQ, mortgage rules, Dodd-Frank, job growth (regionally/nationally/internationally), population trends … these are only a number of different influences over buyer behavior.
This is not to say that using COMPS to help price a home is a bad idea, but understanding what has happened recently in the market will help you make a more sound decision – especially in the Bay River area. Properties are at lows right now as opposed to highs, so determining a point from which to begin your analysis will help you immensely. Observing patterns in past sales has value – it is when individuals choose to use COMPS exclusively that results fall short, especially in a dynamic market. The more rapidly a market shifts, the less value any individual COMP will have.
Use Both Past and Future When Pricing
No pricing model is complete without some prediction of future events, but don’t feel like you have to take a shot in the dark here – there are some relatively simple tools that can help guide your analysis. Predicting the future is much more challenging, but it’s certainly not impossible. The programs used for these analyses are inexpensive, user-friendly, and able to provide some level of prediction in almost all situations.
Anytime you are pricing an asset you should set your mind to ‘what behavior should we expect from our audience?’ and this can only be achieved by glimpsing into the future, as cloudy as it may seem. When it comes to Bay River properties, these are most likely going to be places that new buyers plan on using year-round to spend their weekends relaxing. The beauty of this region is its accessibility and breadth. It is not a resort area, nor some place to purchase a timeshare. Value is based on the user and how much they are planning to take advantage of the asset. You know that the sunsets and weekends spent on the water are a much better deal than paying for resort rentals, hotel rooms, travel expenses, etc. – and you can assume buyers will understand this too.
