What’s This House Worth?

Written by Jeff Gunther

On November 1, 2020

Would you like to know what any given house will sell for?

The simple answer is:

All houses sell for the highest price a qualified buyer will pay, and the lowest price a seller will accept.

… and, figuring out in advance where that point might be is actually not that hard.

Here are three methods Realtors®, Appraisers, and Investors use to determine value, and a brief description of each.

    • Comparative Market Analysis
    • Replacement Cost
    • Investment Approach

COMPARATIVE MARKET ANALYSIS (CMA)

This method is favoured by most Realtors®, and makes the most sense if you’re planning to buy or sell a family home.

Realtors® simply access MLS® data to determine what houses like yours, in your neighbourhood, have recently sold for. They also look at other houses, like yours, that are currently for sale — that’s the competition — and houses, like yours, that did not sell — those that might have been priced too high.

They might not find a comparison exactly the same as yours, but it’s not too difficult to make adjustments. (For example: what’s the comparative value of a garage, or a renovated kitchen?)

Comparative Market Analysis is the most common method used for evaluating residential real estate.

REPLACEMENT COST

This approach attempts to answer the question: What would it cost to find a lot and build the house like the subject property, adjusted for the age of the subject property?

Replacement Cost = Land + Construction – Depreciation

Appraisers often use this method alongside the CMA to confirm their estimate of value.

As an Investor, if I find a property priced well below replacement cost, I’m going to be very interested!

INVESTMENT APPROACH

If you’re looking to buy or sell a home — that you live in — the investment approach is not for you. Investors are almost always focused on paying the lowest price possible.

Investors use a variety of methods to determine the value of real estate, but here’s a quick rule of thumb you can easily learn and experiment with:

Gross Rent Multiplier (GRM)

In order to use this rule of thumb, you’ll need to gather some information about the asset type and location you’re interested in.

Find the average sale price and average monthly rent (x 12 to get annual rent), and simply divide…

$162,000 [price] / ($1,350 x 12) [annual rent] = 10 [GRM]

That’s your gross rent multiplier: 10. This means properties like this one are worth about 10 times annual rent.

Armed with this information, you can quickly analyze almost any similar property. If you know of one that will rent for $1,500 (x 12 months), just multiply by 10. You might be willing to pay up to $180,000…

($1,500 x 12) [annual rent] x 10 [GRM] = $180,000 [price]

And, if someone is asking $192,000, you know you’ll need to get at least $1,600/month in rent…

$192,000 [price] / 10 [GRM] = ($19,200/12) [rent] = $1,600/month

So, there you have it: 3 ways to find out what a house is worth!

  • COMPARATIVE MARKET ANALYSIS (CMA)
  • REPLACEMENT COST
  • INVESTMENT APPROACH

Secret: Ultimately, every house will sell for the most a qualified buyer will pay and the least a willing seller will accept.

* You can find a video of this post on YouTube.

You May Also Like…

Cap Rate Magic

Cap Rate Magic

Capitalization Rate: Simple Explanation, Calculation, Application If you intend to master multifamily or commercial real estate investment, you’re going to need a clear understanding of how Cap Rate works. In this post you’ll: learn what Cap Rate is, and a simple...

Are You Ready?

Are You Ready?

HAPPY NEW YEAR! 2021 is a new year; a fresh start; a fresh opportunity to level-up! In the year ahead, I expect to be providing access to even more great content for people interested in real estate, and... ...on concepts surrounding the achievement of financial...

The Rhythm of Real Estate

The Rhythm of Real Estate

Understanding Economic Cycles (Part III): The 18.6 Year Cycle & Coming CRASH   Are you concerned about your financial future? Well, history leaves clues. This 18.6 Year Cycle has driven the rhythm of real estate for well over two centuries, and is signaling a...

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *