Estimating Market Value

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Estimating rent and market value are the same process. First, I will show you how to estimate the market value, then the rent.

I define market value as what a ready, willing and able buyer will pay for a property. The market value of a property is primarily established based on recent similar properties sold. Where it all falls down is the word "similar". More on this after we work through an example.

Suppose you are considering buying a property (which I will call the subject property) with the following characteristics. What you want to know is the market value and the market rent. I will start with the market value.

• SF: 1499

• Garage: 2

• Lot: 3,900

• Beds: 3

• Built: 2000

• Stories: 2

• Asking Price: 239,000

The process is as follows:

1. Gather all the comps within a reasonable distance (2 miles) from the subject property
2. Find out the distance using Google maps from each comp to the subject property
3. Apply filters to each comp, eliminating any that do not conform
4. Determine the $/SF for each remaining comp
5. Calculate the average $/SF for the comps
6. Multiply the average comp $/SF x the SF of the subject property

Start by finding recent sales close to the subject property. We usually start with 0.25mi and sold in the last 90 days. There are a number of real estate sites where you can see a map with markers showing what sold recently. See the map below. "SP" is the subject property.

Below is the data for all the properties marked on the map.

ID#	SqFt	Sale Price	Garage	Lot	Beds	Built	Stories
1	1501	224000	2	3049	3	2010	2
2	1404	220000	2	3300	3	2001	2
3	1403	220000	2	2900	3	2000	2
4	1599	215000	2	4500	4	2003	2
5	1600	225600	3	4000	3	1995	1
6	1650	244200	3	3500	3	2015	2
7	2328	360840	4	4400	4	2018	2
8	1250	202500	3	2900	3	2019	1
9	1510	225343	3	3600	3	1999	2
10	1660	228000	3	3700	3	2002	2

In order to have a reasonable estimate of the market value, I would like at least 3 good comps. So, we will need to narrow the list. This is where the local market, experience plus the number of available comps comes in to play. I will use the following filters to do an initial screen. Note, everything is relative to the subject property (SP).

• Beds: 3 to 4
• Garage: 2
• SF: ±10%
• Built: ±7 years
• Stories: 2
• Distance: \<1m data-preserve-html-node="true"

Add the distance from the comps to the subject property to the table:

ID#	Dist	SqFt	Sale Price	Garage	Lot	Beds	Built	Stories
1	0.6	1501	224000	2	3049	3	2010	2
2	0.25	1404	220000	2	3300	3	2001	2
3	0.35	1403	220000	2	2900	3	2000	2
4	0.25	1599	215000	2	4500	4	2003	2
5	1.9	1600	225600	3	4000	3	1995	1
6	0.9	1650	244200	2	3500	3	2015	2
7	0.6	2299	356345	2	4400	4	2018	2
8	1.1	1250	202500	2	2900	3	2019	1
9	2	1510	225343	2	3600	3	1999	2
10	0.4	1660	228000	3	3700	3	2002	2

Working through the filters:

• Beds: 3 to 4 - All OK

• Garage: 2 - Numbers 5 and 10 are eliminated

• SF: ±10% - If the limit is ±10%, the acceptable range are 1,34SF to 1648SF. Numbers 6, 7 and 10 eliminated

• Built: ±7 years so the range is 1995 to 2007. Numbers 1, 7 and 8 are eliminated.

• Stories: 2 so number 5 is eliminated

• Distance: \<1mi data-preserve-html-node="true" so numbers 8 and 9 are eliminated.

Below are the comps that passed the filters:

ID#	Dist	SqFt	Sale Price	Garage	Lot	Beds	Built	Stories
2	0.25	1404	220000	2	3300	3	2001	2
3	0.35	1403	220000	2	2900	3	2000	2
4	0.25	1599	215000	2	4500	4	2003	2

Note that in the real world there are other considerations such as the condition of the property and proximity to nuisances (freeway, gas station, etc.) but I will ignore such factors here and assume that they are all in similar condition.

Now that I have a reasonable number of good comps, the next step is to calculate the $/SF for each property. For example, for #2: $220,000 / 1,403SF = $157/SF. I will add another column with the $/SF value.

ID#	Dist	SqFt	Sale Price	$/SF	Garage	Lot	Beds	Built	Stories
2	0.25	1404	220000	156	2	3300	3	2001	2
3	0.35	1403	220000	156	2	2900	3	2000	2
4	0.25	1599	215000	134	2	4500	4	2003	2

To compute the average $/SF for the remaining comps, the calculation is as follows:

Average $/SF = (156 + 156 + 134) / 3 = 149/SF

149/SF seems wrong. Notice that #4 is 134/SF and the other two are 156/SF. If you checked the details on #4 you would find that something is off. Maybe it’s the condition of the property (look at the photos, look at the street in Google street view, etc.) or something else. Since 134/SF is way off I will eliminate #4 from consideration and recalculate the average.

Average $/SF = (156 + 156) /2 = 156/SF

Next I will multiply the average $/SF x the SF of the subject property:

Market Value = 1,499SF x $156/SF = $234,000

While the above example is overly simplistic, this is how you calculate the market value of a property. In reality, you may need to go further in distance or go back longer time or a combination of the two in order to find sufficient good comps.

In this example the asking price for the subject property is $239,000. So it appears to be about $5,000 above market. If the property is in great condition, it might be worth the premium. Or, it could just be over priced.

Market Rent

Rental rates are estimated the same way. Below are a set of recently rented properties that conform to the subject property.

Dist	SqFt	Monthly Rent	$/SF	Garage	Lot	Beds	Built	Stories
0.6	1500	1200	0.80	2	3345	3	2005	2
0.57	1403	1200	0.86	2	3700	3	2006	2
0.3	1599	1425	0.89	2	4420	3	1999	2

Computing the average$/SF for the comps:

Average $/SF = (0.80 + 0.86 + 0.89)/3 = 0.85/SF

Multiply the Average $/SF x the subject property SF:

Market Rent = 1,499SF x $0.85/SF = $1,274

In another chapter you will learn how to calculate the maximum offer price based on the rent.

Summary

In this article you learned how to estimate the market value and the market rent. This was a simplistic example but the concepts are right, and is what we do every day.