Ian Walsh of our Philadelphia office wrote an article that appeared in Scotsman Guide, which is the leading resource for mortgage originators, on September 2, 2016. Read the article below, and see the original publication here.

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How to Become a Master at Evaluating Property Value

Finding sound comparisons is key to estimating prices accurately

By Ian Walsh, Vice President, Hard Money Bankers

Evaluating the value of a property based on sales of comparable property is an essential skill for mortgage brokers and their investor clients. But many investors buy property without the sort of basic investigation that will give them an accurate picture of what the property is really worth and what sort of resale value it will command.

Using comparable sales to establish the value of a property is not that difficult. But it takes some time to develop the skills. For brokers and investors who pay close attention, however, pricing commercial property is easier, for instance, than attempting to evaluate the value of an individual stock and predict whether the price of the stock will rise or fall.

Regardless of whether you’re picking stocks or buying commercial property, knowing the value of what you are buying is a key piece of information. It allows you to determine whether the deal will make money or lose money.

Find similar properties

One concept to establish before looking at how to run comps is to define what comparable sales actually are. Determining the value of a commercial property is the same as determining the value on any item you buy. The important thing to remember is that the value you are trying to find is what the seller is willing to accept. You can ask or offer any price you want, but until the condition meets the right price point, the property will not sell.

The property you are evaluating must be compared to other similar, if not identical, properties as the gauge of price. It would be the same idea as you buying a candy bar from a store. There are likely 20 candy bars in the box, and they are all exactly the same, so they are priced at the exact same price.

“ The more time you spend studying property values and spotting pricing trends,
the better you will be at the techniques that will help you find good investments
and walk away from bad ones. ”

As long as people are buying at that price in recent history, then it is safe to assume that particular candy bar will in the near future sell at that price. If you try to determine the value of that candy bar by using a different brand, different store, different size and different location in the store, then you are bringing in more and more speculation and risk being inaccurate. Applying this concept to evaluating commercial property is an identical process.

Online resources are invaluable in gathering information and providing a historical perspective on the value of comparable properties. Your local Multiple Listing Service (MLS) is a good source of information for single-family residence investments and, in some cases, other types of commercial real estate. The listings provide a useful mix of active and sold properties, as well as information about what properties sell more quickly than others and what properties have been withdrawn from the market.

There are alternatives, if you do not have access to the MLS, or if the service in your area does not include much commercial property. Free commercial property websites allow you to compare properties in similar locations to the property you are considering. But when you are determining the real value of a property, look at its eventual actual selling price, rather than the asking price or price estimate provided by the free website. Commercial Realtors also are very good sources of comparable-price information, provided they are practitioners with whom you have a history and a high level of trust.

When you are making comparisons between properties, it is hard to overestimate the importance of the locations of those properties. When you’re considering property in a city, stay within one-tenth of a mile when choosing properties for comparison. In a suburb, look at property within three-tenths of a mile and, if you’re considering a single-family residence investment, pay attention to the neighborhood and quality of schools.

No substitute for experience

After you gain experience looking at listings, you will be able to spot properties that were sold at investor prices and, within a year, renovated and sold at a profit. A good way to improve this skill is to choose a date in MLS that is two or three years in the past and a range of time going forward that is about six months from that date. Then select a property for evaluation. From there, attempt to determine the resale value of the subject property based on the value of other properties in the same date range. See how close your determination is to the actual selling price of the property.

If you are struggling to find the value of a property, then walking away from the deal is potentially your best option. It does not make sense to increase your risk level by trying to make a deal work when you are unsure of the property-value evaluation. Acknowledging that a property is hard to evaluate can be just as important as knowing when a property has a very clear value.

There is no substitute for practice at evaluating comparable properties. The more time you spend studying property values and spotting pricing trends, the better you will be at the techniques that will help you find good investments and walk away from bad ones.

There isn’t a short cut to learning how to evaluate a property. Online tools attempt to give people automatic values by using algorithms. To date, they do not work well and should not be used as a method for determining property value.

As an investor or broker, knowing how to find property values from behind a computer screen is helpful, but there also is value to learning a technique known as “The 50 House Rule.” That is, look at 50 pieces of property, analyze price, condition, location, renovation costs and a host of other factors. This will give you a good idea as to what the local market has to offer and potential values of the properties in a given area.

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There are many techniques that you can use when learning how to evaluate properties. All of them require practice and repetition. Once you have the specifications memorized, applying them is the part that takes time to learn.

In real estate sales and investing, there is not a single more important skill. The better you become at evaluating the sales price of a property, the more you are reducing financial risk for yourself and the client, and increasing the chances for success.