If you have a time machine, determining the historical value of a property at a given point must be pretty simple.  You take the machine there, sell the property and then return to the present with the exact knowledge of how much it was worth at that particular time.

When time machines are in short supply, we need to do things the old-fashioned way.  It’s an activity that we undertake regularly for our clients and while it has some complexity, the logic is pretty easy to follow.

Whether it is to calculate the capital gains you’ll owe on an investment property that you lived in initially or determining how to split the increase in a property when there are parties that gained an ownership stake after purchase, you sometimes need to know how much a place was worth at a certain point in time.

Here’s the five different approaches we consider in order to come up with an accurate historical valuation for a property.

Neighbourhood Average Sale Price

This is the easiest approach we use.  If you take a look at sales of the type of property in the MLS Community (effectively your neighbourhood) at the time you want it valued, you get an average sale price back then.  It’s just an average and the range can be considerable, but it gives you a broad understanding of the prices being paid at that time.

Let’s look at an example for a semi-detached house in the Mount Pleasant East neighbourhood of Toronto.  We’ll say you bought it in June, 2007 for $555,000 and you want to know what it was worth when you moved out and it became an investment property in April, 2011.

When we looked up the average sale price for semi-detached houses in that neighbourhood in April, 2011, it was $683,000.

Adjusted Purchase Price

The next approach is a bit more complex.  We can analyze the market conditions from when you purchased the property in order to assess the difference in your property compared to the average sale price.  Once we do so, we can extrapolate a value as of a later date by assuming the same premium or discount to the average sale price as when you bought the property.

Let’s continue with our above example property and take this approach to establishing a historical value.

  • We can look at your purchase price and compare it to the average sale price for that type of property in the area at the same time. This gives us a percentage over or below the average sale price, which we can then apply against another time period’s current average sale price.  We need to also make sure that the data we are using is reliable, which means a large enough sample size.  In this case, there are not enough sales at the Mount Pleasant East level (MLS Community) and we need to go a larger geographic area, namely Toronto.  This is less specific, but the data is reliable.
  • When we look at the average sale price in Toronto for this type of property (semi-detached) in June, 2007, we see that it was $432,400. If we look at the sales data from April, 2011, we see an average sale price of $564,379.  This means that since then, prices have gone up by about 31%.  If we assume that the same difference in sale price for the property that existed back in June, 2007 (when it sold for 28% higher than the average sale then) applies in April, 2011, we get an value for the property of approximately $724,000 as of that date.

MPAC Assessed Value of Best Comparable

We now turn to finding a property that is the best comparable sale for your property at the time we are looking to value your property.  No two homes are identical, and we cannot simply choose a property and assume your property would sell for the same price.

Instead, we identify the best comparable property and then we use different approaches to compare it with your property.

The first approach we will take with this good comparable sale is to perform an analysis to compare the assessed values of the properties.  The Municipal Property Assessment Corporation (MPAC) uses a statistical model to assess the value of properties for property tax purposes.  While these valuations are typically far below market value, they are useful in that it is a robust model that is applied to all properties.

Using the same property example as before, we can add in the example of the best comparable that sold at that time and then extrapolate the value of your property.

  • Say a good comparable sale to your property is valued by MPAC at $950,000 and your property has an assessed value of $900,000, which is 6% lower.  If the comparable was listed at $699,000 and it sold for $821,000, we know that is 117% of list price.
  • If we took the difference in the two assessed values from MPAC and took that as a proxy for the difference in value overall, it would give us estimated value for your home at that time of approximately $777,000.

Square Footage of Best Comparable

The next approach we can take to equalize the two properties is to compare the sale of this best comparable with your property from the perspective of square footage of the homes.  We are able to purchase the square footage for each property from MPAC and from that we can calculate the price per sf that the comparable was able to command on the open market.  This can be used as a proxy for how much your property would have sold for at the same time.

Using our above example properties, this is what we see.

When we pull the MPAC floor area report for the best comparable to your property, it is listed as having 1,520 sf above grade for the home.  Based on a sale price of $821,000, that works out to $540 per square foot.  The MPAC floor area report for your property shows square footage of 1,615 above grade for the home.  In both cases, the square footage doesn’t include below grade space such as basements or any outdoor areas.  If we apply the same price per square foot that the comparable sold for, we come up with an estimated sale price of approximately $873,000 for your home.

Lot Frontage of Best Comparable

Finally, we can use a third approach with our best comparable, where we compare it with your property using the lot frontage for each home.  The lot frontage is a large factor in the size of a home (more so than the lot depth, which is often not the limiting factor) and it can have a huge impact when valuing a home for a potential tear-down and rebuild.

One last time, let’s use the our example properties and see what the data looks like.

When we take the lot frontage for our best comparable from MPAC, it is listed as having a 25 foot frontage.  Based on the sale price of $821,000, that works out to $32,840 per linear foot of frontage.  The MPAC lot dimensions for your property shows lot frontage of 20 linear feet. If we apply the same price per linear foot of frontage that the comparable sold for, we come up with an estimated sale price of $640,380 for your home.

When we finish with all five approaches, we have five datapoints of possible values for the home at a certain point in time.  With the details we used in the above examples, the average value for the home is approximately $739,000.

This is a reasonable assumption of value for the example property, but it can be further refined by assigning weight to each of the values.  Given the range is from around $640,000 to around $872,000, this is a useful final step to make sure we are not giving unwarranted importance to one of the outliers.

When we take this final step, we use our experience as Realtors as well as the relative quality of the data for each point to assign a weighted average.  The end result is a historical value for a property that can be substantiated with lenders, the CRA and court cases.  In this case, the adding of weights for each value adjusted our final valuation for the property as of the date in question to $765,000.  It isn’t a huge difference from the simple average of $739,000 but it is almost certainly more accurate.

Until time machines are readily available, we feel that the above approach that we’ve developed is one of the best ways to determining the value of a property at a given past point in time.

If you need to determine the historical value for a property at a certain date, please get in touch to discuss how we can help.