In this series on valuing real estate, we’ll look at specific factors that contribute to the overall market value of a property, so you can have a better understanding of how market value is estimated. A home’s value is based on what other, similar properties in the neighborhood have sold for within a typical period of three months.
Appraisers use what is called the Direct Comparison Approach, which is based on the principle of substitution. It follows the notion that a prudent buyer would pay no more for a given property than the cost of acquiring a similar one. Of course, not all homes are the same, and there need to be price adjustments to account for these differing characteristics. This is where an appraisal of a property can get complicated, and result in differing opinions regarding the accuracy of pricing.
Particularly in a region such as Metro Vancouver, there are very diverse attributes between subareas, lending to the importance of remaining inside the boundaries to find suitable comparables. I define a suitable comparable as a property with the following similar attributes:
- Type (i.e. condo/house);
- Style (i.e. bungalow/basement entry);
- Age (i.e. within 10 years);
- Number of bedrooms, and;
- Location (preferably in the same building, on the same street, or within the neighborhood).
If there are no similar sold properties over the last three months, the selection is extended outside the subject neighborhood to find comparables in alternative areas. The nature of each district may vary, such as the average age of properties, adverse influences, distance to downtown core and amenities, or topography (slope, floodplain, etc.).
These location adjustments for the comparables are calculated based on a qualitative comparison in relation to the subject property, which can be labelled superior, similar, or inferior. Appraisers use an adjustment template that may be pre-determined, such as what homebuyers would pay to live in a certain area, based on historic numbers.
The sample above is a demonstration of how an appraisal report accounts for adjustments in value. We can see that in order to account for a comparable in a better neighborhood, a negative adjustment is made to bring it in line with the subject property. The superior comparable might have been located closer to transit, or perhaps a commercial district, or it could have had a better, unobstructed view.
The reason why Automated Valuation Models (AVMs) will never be as accurate as human input, is because an appraiser visits every single property in person to see its current state and get a feel for the location at that specific point in time. Negative influences may be noted during these visits, for example, a new high-rise may be obstructing the view of a home, or there may be high levels of traffic congestion and noise, which are difficult but not impossible for AVMs to factor in.
I hope this post serves as a good starting point in helping you understand your home’s value, starting with the old adage: location, location, location. Subsequent posts will delve deeper into the different factors that determine market value, and tips on what additions will increase value before you sell.