How To Determine The Value of Your Las Vegas Property Part 1

Today, I continue with part 2 of my series discussing how to value your potential investment properties using the method I use for Broker Price Opinions.

Adjustments

Once you have obtained your comparables, adjustments are then made to the comparable properties to reflect their features that are superior or inferior to the subject property.  IMPORTANT: The adjustments are calculated on the price of the comparable properties, not the subject.   For example, if a comp sold for $180,000, then you will add or subtract adjustments to that $180,000 in order to account for positive or negative relative features of the subject property. After the necessary adjustments are made, we are left with a reasonably accurate picture of the worth of the subject property. It can be confusing at first, determining whether an adjustment to the price of the comp should be positive or negative, but it gets easier with practice. The basic idea is to use a negative adjustment on the comparable property, if the comp has superior features to the subject property and positive adjustments on the comparable property if the comp has inferior features to subject property.  A BPO looks much like an appraisal, and the adjustments work the same way. Below is an example of a typical BPO/appraisal adjustment spreadsheet.



Based on the above comparables and adjustments, the subject property is worth between $439K and $509K.

How to Calculate Adjustments

Calculating adjustments is a judgment call based on an individual market.  When adjusting for square footage, one should take into account the average price per square foot at which comparable properties are selling in the specific neighborhood being evaluated. As a general rule of thumb, extra bedrooms are worth around $8,000. It is often surprising to people to learn that upgrades like pools and exceptional finishes don't necessarily add much to a property in terms of appraised value. They do, however, make the property easier to rent and easier to sell.

How To Determine The Value of Your Las Vegas Property Part 1

As Las Vegas home prices continue to rise, many homeowners are finding themselves in a position to sell their homes.  Investors, also, may be looking to cash-in for a profit on properties they purchased at the bottom of the market.  Clients often approach me asking for guidance on their list price.  They want to know what their property is worth.  Certainly, there is no substitute for a Realtor that really knows their city and can help you understand the intricacies of pricing within certain neighborhoods, price points, and subdivisions. But even an out of town investor, with little familiarity for the Las Vegas market, can calculate a reasonable value for their property by knowing how to adjust local comps.

Over the years, I have completed numerous broker price opinions (BPOs) for banks.  Broker price opinions help lending institutions determine values on properties.  Using the BPO pricing format can help you to generate your own reasonable evaluation of what your property is worth. When completing a BPO, you are required to reference three sold and three active comparables. Those comps should be as similar to the subject property as possible. But, since comparable properties can vary tremendously between those that are very similar to the subject property (such as model matches) and those that are quite different (areas with limited inventory) the key to an accurate BPO is making accurate adjustments. Every home is different and making accurate monetary adjustments to account for those differences is the key to producing an accurate BPO.
Let's begin by examining the typical bank guidelines for selecting comps to use in valuing a property.

BPO Guidelines

• Distance:  All comps must be within 1 mile of the subject property if it is in an urban or suburban neighborhood.

• Age:  All comps must be within 10 years of subject property, unless the home is over 50 years old.  At that point the age brackets can be widened as necessary.

• Size/square Footage:  Square footage for possible comps must be within 20% of the subject property.  Basement square footage and finish are evaluated separately from above ground square footage and is valued at a different rate.

• Property type:  Comparable properties must be the same type as subject.  Single family detached homes must be compared to single family detached homes, duplexes to duplexes, condos to condos, etc..

• Bedroom/bathroom count: Comparable properties must have a bedroom and bathroom count within one unit of the subject property.

• Style:  Although not required, it is advisable to compare similar styles of home.  Two story homes should be compared to two story homes, split level to split level, ranch to ranch.

• Sale date:  Sold comps should have a close date within the last six months. Many banks prefer three months.

Exceptions to Guidelines

Not every property has three perfect sold and active comparables in the same neighborhood.  If you have to break the guidelines, make sure that you are breaking them because you legitimately have to, not because you are using comps that provide you with a higher (or lower) price target. When preparing a BPO for a bank or other lending institution, brokers are required to thoroughly document any exceptions they have made to the guidelines.  This is a good practice for private investors as well.

In my next article, I will discuss the adjustments that must be made to comparables to arrive at an accurate BPO.