There is a lot that goes into determining the value of a particular property but an important part of the equation is comparing it against other properties. If you’ve ever seen someone make a mistake when choosing a comparable and then watched the negative consequences that occurred as a result, you understand how picking the right thing to compare is crucial.
Our team has done thousands of real estate valuations and it all begins with choosing the right comparables. Here’s our three rules that must be followed in order to choose the best comparables and come up with the most accurate valuation.
#1 – It does or it doesn’t.
When we look at a property and its comparable properties, we look closely at the attributes of the properties. There are a number of important elements to every type of property and they will play a huge role in the level of demand for the property and therefore the value we can ascribe.
For freehold homes, the characteristics that need to be considered are:
- Separate basement entrance
- Finished basement
- 3 bedrooms
- 2 bathrooms
- Central AC
- Usable backyard
These are all binary (0 or 1, yes or no, it does or it doesn’t) attributes of the property that are important to the majority of buyers. A home that has all of the above attributes appeals to most buyers and, as importantly, doesn’t lead certain buyers to avoid it.
Whenever a property or comparable property is lacking in one of these binary aspects, it impacts the demand and therefore the price. No parking? Some buyers won’t even have it show up on their search. Only 2 bedrooms? Some buyers won’t even consider it. No separate basement entrance? Investors looking for properties with basement apartment potential won’t be in the mix.
For condo apartments, the binary attributes are:
- Pets permitted in building
- Ensuite laundry
When you compare a unit against other units, these are attributes that dramatically influence the number of interested buyers. Lots of buyers want an outdoor space and won’t consider a unit without a balcony of some sort. For buyers with pets, moving to a building that doesn’t permit their furry family member is not an option.
#2 – It’s not all subjective.
While there are some attributes that a property either has or doesn’t have, there are a number of other objective aspects about a property. These aspects vary between properties but they are not subjective.
Examples include square footage of the house or condo, lot dimensions (width and depth of the property) for a house, MPAC assessed value, maintenance fees for a condo (and what utilities are included), exposure (direction the house faces or the condo unit faces), non-residential neighbours (commercial or industrial units, cemeteries, utilities buildings) number of parking spots and property taxes.
Certain characteristics of a property that you would think are objective are actually relatively subjective when there is no agreed upon standard. A den in a condo can be a full room with a proper door and closets or it can be an indent in the wall where you could put a bench. The number of bedrooms seems like it would be an objective fact, but some “bedrooms” are too small for all but a twin bed and many buyers would consider it to not be an actual bedroom.
Even within objective aspects such as square footage, elements such as layout play a big part in the value a buyer ascribes to the objective aspect. A 1200 sf, three store townhouse with 400 sf eaten up by stairwells and landings can “feel” smaller than a 900 sf, single level condo apartment. Regardless, we can try to use objective facts to compare otherwise different properties and limit the subjective aspect to a more general discussion.
#3 – Looks matter.
Finally, the design, finishes and level of upkeep can dramatically impact the value of a property. Yes, looks do, in fact, matter.
While this is most often seen in condo buildings where you can view identical units on different floors and find one appealing and the other a disaster, freehold homes often have similar layouts to each other as well. Just like with condo units, one house can feel airy and bright while another house with a similar layout can feel drab and uninviting.
The appeal of a property is definitely more on the subjective side of the equation, as one person’s disaster is another person’s dream. In a broad sense, however, we can say that how a property feels and looks has a significant impact on the number of interested buyers.
A property that has ticked all of the boxes in terms of must-have, binary factors, as well as has nice finishes and has been kept in good shape is likely to attract the most buyers. There are a significant number of buyers who only want to buy move-in ready properties. As the required work to update or upgrade a property becomes less cosmetic and more significant, the number of interested buyers decreases.
As importantly, the more work that needs to be done, the more the level of uncertainty about the costs rise. The reason flippers and contractors are often the winners in a multiple offer situation is not simply because they have more money. It’s because such knowledgeable buyers understand the actual likely cost of the work and aren’t putting in a safety buffer that a more typical buyer might feel is necessary.
The work of comparing a particular property (whether for sale or to make an offer) involves taking these three considerations into account and then crunching numbers. While it is most definitely not a strict formula, the output we need to give our client is without a doubt a number. In most cases, it is a fairly tight range with a price that would be great to get as well as either a price we shouldn’t go below (when selling) or above (when buying).
If you are looking to buy or sell real estate, you owe it to yourself to work with someone who takes pricing extremely seriously. Please don’t hesitate to get in touch with us and we’ll move you forward.