COMMENT OF THE DAY: WHAT’S IT WORTH TO YOU? “. . . Personally, I think that dollar-per-square foot calculations have a value slightly above worthless but well below useful. Nor do I think that ‘comps’ are particularly meaningful. Obviously, others do not think the same. Regardless, if the seller can get what they want for the property, so be it. It probably won’t affect me, at least in the short term, in the slightest. . . . Heck, I think that most real estate (whether here in Houston or elsewhere) is vastly overpriced, and that the market has a long way to fall before housing prices become more reasonable in relation to household earnings.” [Random Poster, commenting on Swamplot Price Adjuster: Your Cherryhurst Neighbors]
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Yo Random Poster- the question of value is one that has long been an interest of mine. If such things as dollar per square foot and recent sales of similar properties (“comps”) are not used by you, how do you determine your own target price when you are buying something?
Perceived age of listing agent multiplied by first 3 digits of mls number..? Only kidding, R.P.- really– how do you arrive at value?
Harold,
Among other things, I consider:
(i) replacement cost for the property (obviously, this only applies to improved property);
(ii) distance to desireable employment, shopping, recreational centers;
(iii) the perceived “worth” of the applicable school district and the likelihood that the school district will remain above-average;
(iv) geographic features of the property (I think that higher elevated properties are more valuable in Houston than depressed ones, likewise, heavily wooded lots are better than ones with little to no tree cover);
(v) future marketability of the property (to me, a 1 bedroom condo will be harder to sell than a 3-4 bedroom single-story house, since the market of those who would be interested in purchasing the condo is generally more restricted than it is for the house; likewise, the market for 3-4 bedroom houses is a lot larger than it is for 20 room mansions);
(vi) quality of construction (a place that is built well, and is thus less likely to cause the homeowner future headaches, is more valuable to me than a similiar sized place that was slapped together overnight with baling wire and twist-ties);
(vii) anticipated maintenance expenses; and, most importantly to me
(viii) ratio between the purchase price and average household earnings and, by extension, how many months/years the average person (that would likely be interested in buying the place) would have to work to recoup the purchase price, while still being able to fund their general life expenses, retirement accounts, and emergency savings account.
The reason I don’t put much faith in dollar-per-square foot calculations is because they have a tendency to be (perhaps intentionally?) misleading: $200 per square foot tells you virtually nothing about a place except that the price divided by the square footage equals $200.
And “comps” are equally as useless because they don’t really help determine the _fundamental_ value of a place. It is much like executive board compensation: just because one place (or person) received $X doesn’t mean another place (or person) should be valued the same, but inevitably people do and thus the upward spiral of price inflation marches on, without anyone ever saying “hey, wait, just why was did someone pay $X for that property (or person)?”
Furthermore, if all real property is unique, then how can “comps” be of any great assistance in determining the value of the property? After all, does not a “comparable,” by its very nature, suggest that the property is not really all that unique?
In any event, do I have some specific formula where I weight items (i) through (iii) one amount and items (iv) though (vi) another, and divide it all by item (viii)? No, I don’t. But I do think that any formulation of value has to give strong and significant consideration and weight to item (viii) because if a particular property isn’t truly affordable to, and thus attainable by, the masses, then the property isn’t really going to be worth much to many.
Your number “viii”, the ratio between purchase price and earnings, is where you are not “getting” this property, and Cherryhurst. The inner loop isn’t more expensive only because there are high earners there. It is more expensive because people pay higher per centage of their earnings to live there. Not only that, they squeeze themselves into smaller houses to do it! (because of the prevalence of smaller housing stock)Bottom line– inner looper will pay more per square foot to live in a smaller house because they would rather live here than the suburbs. And Cherryhurst is one of the crown jewel neighborhoods of the inner loop. But as the surfers say”If you don’t surf, don’t start”. And if you don’r “get” living in the city, save your money and live out in the ‘burbs.
Random Poster, what you’re describing is a tool that professional appraisers use known as a Sales Price Adjustment Chart, where all pertinent differences between the subject property and the comps are lined up, compared, and adjusted away. If there is decent enough sample size, multivariate regression can be used. Usually, though, it’s just better to go with your gut.
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Some of the items you’re looking at are already priced into the comps, though. Marketability is an example. In a stabilized community, there really isn’t going to be anything that would cause you to expect that homes will suddenly become less easy to sell (aside from global/regional trends that get priced in everywhere), and to the extent that personal preference comes into play, there will always be people who care and people who don’t. But…there will always be buyers willing to hold out for someone who doesn’t care if that person will pay a higher price. Where personal preference is concerned, just don’t forget that it’s the buyer that likes the property the most that gets to set the sale price; that happens over and over and over, and then you have a market price…also set by the collective group of high bidders.
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As far as determining what is affordable to buyers in aggregate and how that’s changing, it’s a pretty straightforward issue of looking at transactional volume, sale prices (segmented by property type and characteristics), interest rate trends, and the Fed’s Flow of Funds data. But that’s part of the thing is that your comps have to be timely so that they reliably reflect current market conditions.