How do you figure out the value of a property?
- It is not the price you paid for the home plus improvements and real estate commissions.
- It is not how much your friend, in-laws, attorney, accountant, sister with a real estate license, neighbor or anyone else thinks your house is worth unless they are willing to buy it at that price and you are willing to sell it at that price.
- It isn’t what you paid for the home plus a needed or expected rate of appreciation.
- It isn’t more than what your neighbor’s house sold for because you like your house better.
I recommend you read Wikipedia's page on Real Estate Appraisal to give you a great understanding on how to determine the value of real property today. In a nutshell there are three approaches to figuring out value - cost approach, sales comparison approach and income approach.
This method attempts to figure out market value by recreating the property. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements.
Let's say you found a fabulous Sarasota beach home on Casey Key for $4,000,000 that you are thinking of buying. However, you notice that the lot next door is for sale at $1,000,000. Both lots are virtually the same. You also consulted with some builders and received estimates of around $1,500,000 to recreate the existing home that you are thinking of buying. All in all it would run you about $2,500,000 to recreate the same home but only newer. Does $4,000,000 sound a little pricey? It will to most.
Sales Comparison Approach
Most residential Realtors use the sales comparison approach to figure out the value of a home. This method is based on the principle of substitution. It assumes a knowledgeable buyer will pay no more for a property than it would cost to purchase a comparable substitute property.
For example, take a condo building like 888 in downtown Sarasota where the differences in condos are not substantial. All of the units face west with great water views, were built at the same time and have the same amenities. The only differences are the floors they are on, condition of the interior, floorplans and size. Assume there are three units in the building with the same floor plan for sale and are priced between $350,000 and $375,000. What are the chances a buyer is going to pick a different unit in the building priced at $475,000 if it is pretty much the same as the other three units? Probably a very slim chance.
There are flaws with this method. Keep in mind that the sales approach takes into consideration recent sales. If prices are rising or falling quickly then sales that occured 2 or 3 months ago can be outdated. Price adjustments need to made for when prices are on the move. For example, remember in 2005 when prices were shooting up? Homes were selling above their 'appraised value". Remember in 2008 and 2009 when prices were falling quickly? Homes were selling below their "appraised value".
The income approach is not used much for residential Sarasota real estate. If is used in multi-family or commercial property appraisals. Income does play an important part of value when analyzing beach condos that generate cash flows. With all else equal a Siesta Key condo that allows short term rentals will be more valuable than a condo that generates less rental income because of tighter rental restrictions.
Market Value vs. County Assessed Just Market Value
A lot of people try to figure out a way of valuing property by looking at the Sarasota county tax assessed values. I have found that the relationship between what a property will sell for and what the county assesses the property for is too unreliable. I pulled 20 random sales that have occured in the last 30 days and compared the sales price with the county assessed value.
|Address||Sales Price||County Just Market Value||County Market Value/
|825 Longboat Club Road||$12,500,000||$6,197,700||50%|
|5109 Jungle Plum Road||$3,200,000||$2,123,800||66%|
|1300 Ben Franklin #902||$2,875,000||$2,399,800||83%|
|2185 Gulf of Mexico Dr. #221||$1,400,000||$1,123,400||80%|
|800 N. Tamiami Trail #1801||$1,097,500||$926,800||84%|
|1800 Ben Franklin #909||$1,067,500||$1,196,800||112%|
|434 Meadow Lark Drive||$950,000||$635,126||67%|
|646 Waterside Way||$1,000,000||$708,000||71%|
|100 Central #G713||$725,000||$478,100||66%|
|508 S Polk Drive||$695,000||$467,300||67%|
|1750 Ben Franklin Drive||$515,700||$473,000||92%|
|37 Sunset Drive #71||$490,000||$549,400||112%|
|3721 Eagle Hammock Drive||$442,000||$434,800||98%|
|1055 Peppertree Dr. #407||$297,200||$415,000||140%|
|1100 Imperial Dr. #406||$275,000||$212,400||77%|
|4702 Thomas Hoby Place||$267,000||$168,200||63%|
|1393 Fraser Pine Blvd.||$250,000||$241,100||96%|
|2708 Wisteria Place||$245,000||$145,200||59%|
|1796 Cottonwood Trail||$225,000||$273,700||122%|
I divided the Sarasota county assessed just value by the price it sold for. Take a look at the percentages in the third column. They range from 50% up to 140%. Do you see any reliable correlation between the two numbers?
The best way to value real property (in my opinion) is the sales comparison approach.