Reader Question: I am looking at making an offer on a REO. It is a two-bedroom, one-bath, 710 square foot single family home. There is a $127,900 asking price, which is $180.14 per square foot. It sits on a 10,019 square-foot lot that has fire damage.
The comps in the area are; 2/1 960 sq. ft. that sold for $484.000, 3/1 770 sq. ft. that sold for $270.000, and a 2/1 952 sq. ft. that sold for $232.000. What should my offer be on this property approx.? Larille W.
Monty’s answer to the real estate investor question of the week
Monty’s Answer: The question cannot be answered with any degree of accuracy based on the information provided. What we can do is to provide you direction about how to estimate a ” range of value.” Before we do that here are two comments that may be helpful:
1. I am skeptical that you have chosen (or your agent) has chosen good comparable sales. For example, when the subject property is 710 sq. ft., and one of the “comps” is 960 sq. ft., the 25 percent size difference on an already tiny property is too great to qualify for a good comparable.
2. Valuation is too important to take shortcuts in real estate. While making comparisons between properties by dollar-per-square-foot is a quick, easy method, it is likely a very expensive decision. With the Internet, real estate has seen an explosion of aggregators who scrape data from local MLS’s and use dollar-per-square-foot as a tactic to adjust values in their algorithms. This is a “shortcut” that is not an acceptable practice on an individual property, yet many real estate agents and investors have “aped” the aggregators.
Here is a link to an article titled “How to challenge a real estate appraisal” that demonstrates the correct method for making adjustments in features between comparable homes. The article also discusses how to pick comparable properties. The article is too detailed for space allocated in the Q & A section, but is worth checking out.
Dear Monty comments further: “This question and answer should draw a lot of interest. It demonstrates a fundamental flaw in the way some people evaluate property these days. However, it would not shock me that some readers will dismiss the thinking set forth or even challenge it as being “too much work.” My observations watching agents and reading questions posed on the many internet websites suggest this is actually happening a lot. I am no fan of algorithms. ”
Let us know what you think below in the comments area?
About the author: Richard “Monty” Montgomery knows a thing or two about real estate investing, from up-close, get-your-hands-dirty rehab to armchair investing using your self-directed IRA as your funding vehicle. In his nearly half-century in the industry, Monty has bought and sold investment properties,founded a real estate brokerage company using a non-traditional consumer driven model, run his own successful brokerage and founded a corporate relocation company. Now – don’t call him “retired” – he is a sought-after consultant to businesses and entrepreneurs and also shares his knowledge with inquisitive readers through a syndicated newspaper & magazine column and website, “Dear Monty.”
Visit Dear Monty here.
[hs_form id=”4″]
0 Comments