Valuation: Price Per Square Foot is only Part of the Answer

Additons and price per square foot values - house being added onto in Silicon Valley - price per SF with add onsThe “price per square foot” data point can be useful between uniform or very similar homes, but using it with dissimilar properties (size, lot size, school districts, and other elements) will result in a wrong valuation and upset home sellers and listing agents.

An important real estate principle to know is that smaller homes nearly always sell for more on a per square footage basis than 10-15% larger houses in the same area. The reason why is that kitchens and bathrooms are the most expensive rooms, but often there is just 1 kitchen and a similar number of baths with smaller vs larger homes.

Even if the properties are comparable in many ways, more than 10 or 15% difference in square footage can make the price per SF very wrong.

When to use the price per square foot data set

If evaluating condos in the same complex, such as a 2 bed, 2 bath with 1,000 SF, it makes sense to compare units in the same complex with 900-1100 SF (plus or minus 10%). If nothing is available, going to 15% may work, but the data won’t be as reliable – 850 – 1150 SF.

In a subdivision of houses that are all about the same age and with similar lot sizes, the target would again be 10% of the home size. In a 2,000 SF house, that means plus or minus 200 SF, ideally, but not more than 300 SF.

If a 1500 SF house is included in the analysis of a 2,000 SF house, it will mislead the home owner because the 1500 SF house will sell for more on a per SF basis than the much larger 2,000 SF house. The seller will overprice the home if doing that.

As one factor among many, it’s completely fair to include the price per SF when trying to determine what a home’s probable market value ought to be, as long as it’s within that 10% range, ort 15% at the very outside.

 

Other factors that influence valuation – beyond the price per square foot

Remember, too, that a house, condo or townhouse isn’t worth one exact number, but a range – because the terms involved also impact the sales price. Although price per square foot is one way of finding approximate value, often is not the best, especially if you use it alone, because there are other factors besides the square footage of the house.  Here are some of the other factors that can mess up that valuation based on price per square foot alone:

Location and lot / land differences and price per square foot

  • precise location (view, proximity to something undesirable)
    • for example, one house is next to tidy homes, but another has a junky neighbor or two
    • one house is internal to a neighborhood, and another is on a busier road
    • one residence backs to commercial property or a tall apartment building, which another backs to a single story house
    • whether the street is a good one or full of parked cars & RVs
    • whether the house is below or above grade/street level (most people don’t prefer being down from the street)
  • lot size and usability (flat vs sloped)
  • lot shape & access (flag lots may sell for less than homes directly on the street)
  • back yard size

Home changes and condition
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When a parent, spouse or loved one dies – what do you need to know or do about the house?

Death and Real Estate - Dealing with a Property after A Loved One DiesWhen a parent, spouse or loved one dies and he or she owned a home, there’s a lot for the survivors to do in addition to the very real and painful process of mourning. I have been through this with my own parents (and their house in Saratoga), a great aunt in Willow Glen, and many clients in San Jose, Los Gatos, Palo Alto, and elsewhere in Silicon Valley.

Quick summary of what to do regarding the home first and soon when a loved one dies:

  1. Engage the help of of an attorney and tax professional within the first 30 days or so. Sometimes there are deadlines or goal dates that will help the beneficiaries, and if people take too long to connect with these professionals, some opportunities may close.
  2. Some attorneys are also tax professionals, but most likely these will be different people.
  3. A professional valuation of the home will be needed, usually done by a licensed appraiser, but sometimes a real estate professional can do a market analysis that is acceptable. The home does not have to be empty or cleaned out to have this done.
  4. If you need the names of good tax and legal professionals, feel free to reach out to your real estate agent (or to me, if you are local). Most of us have worked with trust situations and can provide names. Or ask friends and family who’ve recently gone through the same situation and were happy with the people that they hired.
  5. You will need several copies of the certified death certificate. Discuss how many with your tax and legal professional. If you sell or transfer the home, the title company will need it and it will be recorded with the county.

Death, dying, & real estate: where to begin when a loved one dies?

In terms of settling the estate, it is wise to first speak with an attorney and tax professional about the property to find out what is required and advisable.

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Estimating the Probable Buyer’s Value

The probable buyer’s value for a home is very similar to market value, as a home is only worth what a buyer will pay. If the seller wants more than that, it won’t sell. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.

Quick summary on the probable buyer’s value:

  • The probable buyer’s value is a range of what most buyers would pay for a particular property if there was no undue pressure on the buyer or seller.
  • The probable buyer’s value will be impacted by many factors, such as the timing (if there are other houses which are more competitively priced or no other inventory), the property condition, the presentation of the property, the accessibility of the property (how hard is it to see – is it vacant or occupied?), the marketing (photos, floor plans, etc.), and many other things.
  • The buyer’s terms weigh heavily on what the buyer can or will pay for any home.

Sometimes it can be tricky to estimate what a home might sell for. I usually talk with my seller clients about trying to find the probable buyer’s value.

In a balanced market, the seller may have a range of prices that he or she anticipates and would accept. So too with the buyer, whose range will likely be lower than the seller’s. The key is finding where the buyer and seller price ranges overlap.

In an overheated market, which we have now, it’s fairly simple to figure out the floor of pricing, a price point that is supported by past sales, but it’s harder to ascertain the ceiling, which is where very capable and driven bidders may take the price. Next, please find a long-ish (12:36 minute) video on price and terms, mostly regarding overheated markets, but some info on balanced markets, too. 

 

 

Balanced Market

In the balanced or more neutral market, buyers and sellers often have some common ground on valuation of the real estate. This chart below was used in the video above (for those of you who will skip the video):

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What is a bedroom worth?

A common mistake among real estate agents and consumers both is estimating a home’s probable value using only the living space’s square footage. But what about the total number of rooms? Specifically, what is a bedroom worth?

Clearly other factors have a significant impact, such as remodeling done (or deferred maintenance that’s taken place), whether or not there are special features such as pools or tennis courts, the quality of the landscaping, or the presence of a view. Some of these are challenging for pinning down a value since they may be unique to a particular property and there may be no similar comparable properties or “comps”.

All homes, though, have bedrooms. We know (almost intuitively) that it will be challenging to sell a 1 bedroom home and that 6 or more bedrooms may sound like a boarding house and have diminishing value for most consumers. (I’ve known 6 bedroom homes to be presented as 5 bedrooms plus a den or home office.)

 

Calculating value - what is a bedroom worth?

 

Recently I ran into this issue again, where some lovely people I was discussing the market with appeared to be looking at their house’s likely sales price based only on square footage and not seeing the highly likely limitation of having fewer bedrooms than most home buyers want. I decided it would be a good study to pull up two and three bedroom sales in San Jose over recent years and check on the average sale price of each – keeping the properties within a fairly close band of square footage and lot size so that it would be a level playing field. (Most accurate would be in a very small area with a very tight range of square footage, but going that narrow likely leaves us with too few homes for a decent pool of data.)

I did a spot check of smaller, older houses in  San Jose 95126 (roughly the Rose Garden, Shasta Hanchett, and St. Leo’s areas) and used square footage of 1000 SF to 1500 SF and small lot sizes of up to 6000 SF. Also I removed sales on busy roads, such as Hedding. Bottom line: the 3 bedroom houses were selling for an average of $897.72 per square foot, while the 2 bedroom houses were purchased at an average of $837.04 per square foot.

What if we looked at a broader area, and not just older houses? The next section covers all of San Jose and also from 2017 to the present.

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Appraisal value does not equal market value

Appraisal value does not equal market valueAn appraisal value is an opinion of real estate value  by a licensed appraiser, employed when a house or condo is under contract or sale pending with a mortgage, so that the lender does not over-invest. In other words, when an appraisal is used in escrow, it is to protect the bank which is lending money on the property. Appraisals may be used at other times, too.

Market value is what home buyers and sellers will agree on as the sale price of a property.  When Realtors work up a comparative market analysis or competitive market analysis, they try to figure out where the home will sell in the future, or what the market value will be.  They will also strive to bring that sale price to the top of the possible range of likely values – or go beyond it.

Put another way, appraisals attempt to determine the most precise value for what a home should be worth, if buyers and sellers are both unpressured. Home buyers may or may not agree with an appraisal’s results, though.  The appraisal value does not equal market value.   The market may find the property to be worth more or less than what an official appraisal states as the worth of the real estate.

With an appraisal, there is a subjective element to the opinion of value.  For instance, if a brand new kitchen sink is tangerine in color but in great condition, will the appraiser ding it for being unpopular, or value it higher for being new?  I can tell you that most Realtors would take off projected value for that poor color choice – but I doubt that an appraiser would.  How about a flag lot? Is that worth more or less than a standard lot on the street? Most buyers would prefer a home on the street, and that may impact the sale price, but will an appraiser devalue a flag lot? Maybe. (more…)

How Important are Parking Spaces and Garages in Silicon Valley?

Cambrian Park Home, built by LeepMost homes in Silicon Valley come with some type of parking space for cars beyond street parking.  Home buyers want to know that there will be a place for their vehicles (and often their “stuff” too).   Garages and parking are sometimes under-appreciated aspects of evaluating real estate, and sometimes there are parking surprises after the close of escrow, so it will be the focus of today’s topic.

Parking and resale value

Because a real estate purchase is a big ticket item, it is always important to consider the ability to sell it later.  (Always buy with selling in mind!)  Will the property you have or are considering buying be hard to sell  in the future if it is not a red-hot sellers market?  Parking can greatly impact “resale value and overall desirability to a large portion of consumers, who may look at that space as protection for a beloved vehicle, a safety feature, a future hobby room, or many other possibilities.

If you are evaluating a Common Interest Development (CID) condominium, townhouse, or planned unit development home with private roads and parking, there will be some special concerns that may be a little different than if you were purchasing a single family home. We’ll consider both.

General principle:  In all types of housing in the San Jose area, usually the most highly desired type of parking arrangement is an attached garage with direct access into the home and with side by side parking provided (not tandem).  This is not true in all cases but is generally true.  You would not find home buyers interested in historic homes (Victorian, Spanish, Craftsman) wanting a prominent two car garage at the front of the house, commanding the lion’s share of the view from the street. (So don’t expect to see that in Japantown, Naglee Park, or the the Rose Garden areas of San Jose.) But for the typical buyer of the more common ranch style house, the attached garage is expected and appreciated, and if it’s missing it may be a challenge to sell the property later because the property will be appealing to a smaller pool of buyers.

Regarding direct access: garages are not allowed to have a door entering into a bedroom. This is for safety reasons since bedrooms are where residents are most vulnerable, and garages are an area of increased safety risk.
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All comps are not equal

When trying to figure out what market value or a fair price is for a property, Silicon Valley consumers will often look at recent sales nearby which they find online, extract an average price per square foot, and then decide that this is likely to be what a house or condo is worth based on those “comps”.

First factor: the unique real estate itself (how similar are the comps, really?)

Unfortunately, it’s not that simple to figure out that home’s likely sale price or the probable buyer’s value. Homes are much more nuanced than just the average price per square foot.   Unless the comparable sold property is truly comparable in every way – similar quality of updating or remodeling, similar location, similarly expensive landscaping –  and the timeframe recent, too, you’ll have to try to adjust based on varying factors. (And that’s not easy – it’s an appraiser’s area of expertise. But you may say “those comps had remodeled kitchens, so that may be worth X amount of money”. You would not ignore that big of a difference.) Look at the list of homes below – how much can you tell about remodeling, landscaping, or upgrades from a simple list? Not enough.

Comps in a Campbell community

 

Second factor: speed of sale, number of offers

The situation surrounding each sale is likewise quite varied.    A property that gets 4 or more offers on day 7 on the market is a different situation than 1 offer on day 43.  If you are writing a real estate contract on a home that is getting multiple offers, it’s not going to help you to compare it to a stale listing that sold with just one offer.  It’s not just comps: it can be the current competition that largely determines the final sale price of that house or condo.
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Assessed Property Value vs. Market Value of Silicon Valley Real Estate

What's A Home Worth?Some first time home buyers in the San Jose or Silicon Valley area get confused by the “assessed property value” of houses, condos, or townhouses: they mistakenly think that this number has some bearing on the real estate market value.  It doesn’t.  The assessed value is used only for determining the amount of property tax being paid.

Residential real estate in California is reassessed upon transfer of title, or change of ownership, in most cases (there are some exemptions). From there, the assessed value can only go up 2% per year at most (thanks to the passage of Proposition 13 in the 1970s).  When property values decline, as they have recently, owners of properties with higher than market value assessments can appeal and get a temporary rollback in valuation for the purposes of having property taxes lowered.  This is very very common (and even so, the assessed value is usually still off as it’s based loosely on the January values of that year – the values are often higher than market value for these petitioned properties).  The tax assessor’s office has a lot of latitude in determining the assessed values; it is nothing at all like an appraisal, which should use strict comparisons.

Let’s look at a few hypothetical examples, taking tract housing with the same square footage, layout etc:

1 – If a couple purchased a Cambrian Park house in 1960 to 1970 and paid $20,000 for that property, but today’s value is approximately $500,000, the property tax being paid will reflect the long term ownership and won’t be based on the current market value.  That couple might be paying $600 to $800 per year in property taxes with a corresponding “assessed value” of about $52,000. (more…)

Pricing the Unique Home & Land

Sometimes it’s not too hard to find the likely market value of a property: it might be a San Jose tract home where several similar homes, in similar conditions, on similar lot sizes, has sold recently.  Or, if not such a cookie-cutter property, it could be a “typical” type of house for a given part of Silicon Valley – a typical Cambrian area 3 bedroom, 2 bath house, for instance.

But sometimes, you have residential real estate that really is not too similar to others nearby.  It may have been custom built or remodeled to an extreme.  It might have an exceptional location or view.  Or perhaps it’s in a region where there is very low turnover, so no recent sales.

Estimating the probable buyer’s value with a unique home for sale in Silicon Valley is tricky but not impossible.  There may be no “good comps” within a mile, but there are homes that fill similar needs and that’s where you look.  We must put ourselves into the buyer’s shoes as much as possible. (more…)