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.
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!
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.