Square Foot Pricing AVMs And The CMA
If you are in Charlotte real estate, you are often asked
How Much Is That Home per Square Foot?
And my first response would be the famous quote about statistics, there are "Lies, Damned Lies and Statistics" except i'd replace statistics with square foot home pricing. That's the question we Realtor's hear almost daily, but it is all about one of the two million dollar questions, either
"How much should I offer on this house?" or "How much is my home worth?"
While square foot pricing has a certain utility, it is much more difficult to use to predict a certain homes value in the future, just ask Zillow! Let's start back at the beginning.
What is "Cost Per Square foot?"
Square foot pricing is simple mathematical division. When looking at a property, we simply take the sales price, and divide by the reported square feet. Sales Price/Sf=$/sf , or a $200,000 home, with 2000 sf, sold for $100/sf. .Notice I used a Sold home for an example, because that is what is most of interest, sold homes, not homes listed for sale because homes for sale may or may not be accurately valued. In Charlotte, homes sold have a reported exact square footage, this makes a historic view of the transactions quite accurate. But lets think about it a minute? What does math miss? A lot! What doe it tell us? Useful info!
Math misses the condition of the home, does that matter to a buyer? You bet! Math misses the features in the home, buyers appreciate remodeled kitchens and baths, and other upgrades in a newer home. How about age of the house? Or age of the major systems? Developed landscaping? Street location? Do homes on cul de sacs sell higher and quicker than their counterparts mid block on a subdivision street?
All of the Above matter to home buyers and an average price per sf says little about it.
Why then is SF pricing important?
Why do you hear so much in the news media about the "price per square foot?" First, it is easy, it is simple division. No rocket science required. Second, it is an element of the appraisal. Third, when looking at the big picture, for example an entire market (city) of homes, the average price per square foot is more meaningful. Compare the following cities, which might be the most expensive to live in? According to Trulia.com, in San Francisco, the average sold price per sf was $949/sf from August 15 to November 15, 2015 . Manhattan was $1,420/sf for the same period.(WOW!) For a 1000 sf apartment that is $949,000 and $1.42M respectivley!
Charlotte was a modest $130.00/sf for the same period and that means more house for the money! By the ton!
Using those same date ranges lets compare a few Charlotte neighborhoods, and we'll see a range of prices. For example
Dilworth, a close in suburb of arts and crafts homes, the median price was $250/sf, while in Matthews, it was a relatively affordable median of $105/sf. On a 3000 sf house that translates to a median price of $750,000 ($250 x 3000) in Dilworth versus $315,000 ($105 x 3000) in Matthews.
Another interesting use of sf pricing is checking on home prices in general. We can compare neighborhoods year over year for an average increase or decrease. In the example above, Matthews median price per sf for the exact same period one year earlier was $97.5/sf, so we can say confidently that Matthews home prices increased, on average, 7.69% in one year, not bad! We believe this is a better measure than average or median sales price many local MLS's tout when explaining "home prices." By using the sf price, you take out variations based on the size of the home. So, I'm an Analytical and I LOVE price per sf, but you have to know when and when not to use it, use it wisely!
But will it predict what one house in the future will sell for, or should sell for? Well no.
Atleast not by itself. Not the median or average because the average is just that, and neighborhood's will have a range of values. For example there may be 10 sales in the last 180 days in one neighborhood, and they ranged in Sales price per sf from $125 to $275/sf. Why the range? What do you think? If it was an intown neighborhood, some were fully updated and in excellent condition, and others around $100/sf needed the updating.
An average cost per sf is just that,average, and if you buy the lesser house at the average price per sf, you paid too much.
Likewise if you offer the average price per sf on the best house in the 'hood, you won't get anywhere.
An average or median is just one number, used to represent a range of prices, in our case Sold Home prices from low to high. Agents, and their buyers must review the range of square foot prices of comparable sales from the same 'hood, and look for the most similar home, and corresponding square foot price. Here is where square foot pricing will often break down because there are too many variables and it becomes difficult to select the very best comparable sales, and most people looking at aggregate sales numbers don't have the information to do that. And you realize that square footage is just one number among many factors. Computers can't do it, many lesser trained Agents can't do it. Picking the right comparable sale is where valuation becomes the area of expertise of the appraiser. And appraisers use quite a separate valuation method entirely, the Comparable Sales approach, which includes square foot adjustments, but also nearly all the adjustments that make sense to a buyer.
What about AVM's? Automated Valuation Models?
These are what they sound like, data driven algorithms that try to determine a property value from afar, from your desk top computer. The most familiar is the Zillow Zestimate. Here in Charlotte, the city uses an AVM for Tax Values and Assessment. We Realtors use a system called Realist, with all the tax information plus an AVM. Lenders use them all the time calculating refi's and other loans. In a some places the have replaced actual in person appraisals (tax values) but in most places, mortgages and most refi's , they have not. The reason? Again, they just aren't accurate enough, not accurate enough to predict a particular property's current value or expected sales price. We routinely see one Zestimate spot on, and the next 15% off. Tax values are always, almost always , considerably off the actual value of the property. ( We tell buyers that if the Tax Value represents an Actual value, that is by chance!) Maybe one day, but until the algorithm can see into the home and evaluate features and condition, it is not likely to supplant an "eyes on" approach, not dissimilar to how a potential buyer looks at the property.
Comparable Sales Method of Valuation
In this method the Appraiser, or good Agent, looks for the 3 or 4 best or "most comparable" sales in the area. Then they use a spreadsheet equivalent known as a CMA, or Comparative Market Analysis to adjust the prices of the comparable sales to make it more like property of interest. They will adjust first for square footage, essentially asking "What would this property have sold for, dollars more, or dollars less, if it was the exact same size as the property of interest?" They then compare and adjust the houses feature by feature, adding or subtracting value from the comparable properties until they have completed the comparison analysis. Each of the comparable sales now has a "value" as if was the "same" as the subject house. Some of those adjustments would include: square footage, overall condition, functionality of floor plan, lot size, street location, porch or deck additions, key upgrades in kitchen and bathrooms,
Agent's use the CMA all the time. When evaluating the List Price for a prospective purchaser, and when Sellers ask them to recommend an expected sales price for their home, to answer the two fundamental questions of real estate I asked at the beginning but buyers and sellers ask every day, "How much should I offer on this house?" or "How much is my home worth?"
Look for Agents who understand value and valuation models- it is the key to real estate, buying wisely in the first place! At the McDonald Group, we understand value and look for undervalued properties every day. tm
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Author: Admin McDGroup
December 2nd 2015
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