Before you take suggestion from a Realtor while investing in a property, it is important to keep in mind that not all realtors are honest. In every profession some are better than others. However, when it comes to real estate investment it is always better to work with seasoned real estate investors. Proper real estate valuation helps you choose better investments. Real estate valuation is a process that decides the financial value of a real estate investment. Failure to consider all expenses is the base reason for common valuation mistakes.
Common Valuation Mistakes
- Add value to a property for a bedroom
- Incorrectly adjusting for square footage
- Compare non similar style homes with no adjustment
Common Valuation Mistakes: Let’s Explicate
1. Add value to a property for a bedroom
This is by far the most common error noticed. In some cases a bedroom will add value, but generally you cannot count on it. If a house has more bedrooms it is expected to be bigger. A large home is more expensive, but the bedroom is not adding the price, rather it is the square footage. If two houses are of same size and one has an added bedroom it must be lacking something else. It could have much smaller rooms, which will discourage some buyers. It is principally a eye-wash.
The only exception to this is if the house does not conform to the neighbourhood. Say for instance, if the whole neighbourhood has two or three bedrooms houses and you have a one bedroom, it essentially should add value to add a bedroom, even though you are keeping size same. In simple words, you are always recommended to look at the size and not the number of bedrooms. This however, does not hold true for bathrooms. Bathrooms will nearly always add worth.
2. Incorrectly adjust for square footage
A less common, but more shocking blunder is to use a price per square foot model to value a home. This is a common slip-up made by the agents. The error is to use an average price per square foot and multiply that number by the size of the house you are trying to value. It is not sensible to use this process, particularly if your house is on the small or large size for an area. Consider it. Do you think that a 2,000 square foot house actually worth twice as much as a 1,000 square foot house that might be next door? Using a price per sq foot model does not account for the lot.
There is no denying the fact that you need to adjust for size. The simple reason being larger homes carries more value. However, the best way to do this is to get an idea for the required adjustment. This can be very tricky as the value per square foot reduces as the homes get larger. Therefore, it is always advised not to buy the largest or smallest house in an area. However, if you do, use a very conservative modification for size. Try to use is 1/3rd of the average price per square foot as the size adjustment as this is reasonably close to average. Don’t fail to remember this is a rule of thumb and not science.
3. Compare non similar style homes with no adjustment
Now this is something interesting. Comparing the ranch or rambler style home to a home with stairs, like a bi-level or 2-story is something very common. Besides, the house with no stairs is always more costly. Consequently, you need to be very intelligent as a buyer. One most common instance of this mistake is comparing older homes to newer homes. In fact, there are clients comparing her/his home to a never been lived in house one neighbourhood over. Both the houses are almost identical in size and in the same location. However, one is about 25years old and the other one just built. Now, do you actually believe that someone would buy a used home for the same price they can get a new home for? Be sure to adjust for the age.
To Sum up
Understanding these common mistakes would help you to come up with more accurate after repaired values. Be a better investor!
This blog intends to inform you the common valuation mistakes committed and how you may avoid those.
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