In the days of the mega-real estate sites like Zillow and Trulia, the bells and whistles on the sites draw millions of page views every month. And, there really are some useful tools on these site. What you shouldn't be doing as an investor or even a home buyer or seller is using the value estimates on these sites to make decisions.
Even Zillow will tell you that they aren't always on the money. They have a chart of median error percentages in estimates in major cities, and they run mostly between around 7% and 9%. That's around $16,000 on a $200,000 house, so you don't want that kind of number in your research for a wholesale of flip deal for sure. Feel free to use a Zestimate for a quick idea of approximate value, but what you want to do to arrive at an accurate market value is what real estate agents do; develop a CMA, Comparative Market Analysis.
The data you need to create an accurate CMA for a home includes:
•Recent sold home prices, as close to present time as possible.
•Three or more similar recently sold homes with as close to the same characteristics as possible matching your subject home. In other words, number of bedrooms, baths, square footage, etc.
•Some data to adjust the sold price for differences. In other words, how much to add or subtract for a different number of bedrooms, baths, etc.
Now, back to Zillow, don't use their estimates or even prices shown as sold, as you can't be sure where the data came from and its accuracy. You're going to need to get your sold data from the local MLS, Multiple Listing Service. These days, it's all computerized, and you can get an agent to set you up with email alerts for all sold properties, or just get some when you need them.
Now, let's just do an example CMA to get you ready for doing your own. We are considering buying a rental property, and the home has these characteristics:
•1860 square feet
•Single car attached garage
•3 bedrooms
•2 baths
•Normal subdivision lot (and we'll get comps out of the same subdivision, so won't need to do anything to adjust this one). We'll assume the same lot size/value for all of the homes.
Comparable Home A
This and the other homes are all in the same area and sold within the past six weeks.
•1790 square feet
•Single car garage attached
•3 bedrooms
•2 baths
•Sold for $192,500.
Comparable Home B
•1685 square feet
•No garage
•2 bedrooms
•2 baths
•Sold for $167,700
Comparable Home C
•1910 square feet
•2 car attached garage
•3 bedrooms
•2.5 baths
•Sold for $199,600
We have our three "comps," so the next step is to adjust our sold prices to make up for the differences in the homes. The necessary adjustments are:
Comparable Home A
No adjustments are necessary for this one. We don't deal with square footage until later, and this home is pretty much identical to our subject property.
Comparable Home B
The differences here are no garage and only two bedrooms. We need to adjust by:
•Adding to the sold price the value of a single car attached garage. ($7,500)
•Adding to the sold price the value of another bedroom. ($6,000)
•So, $167,700 + $7,500 + $6,000 = $181,200 adjusted sold price.
Comparable Home C
We are going the other way with these adjustments:
•Subtract from the sold price the difference in value between single and double garage. ($6,200)
•Subtract the value of a half bath ($3,200).
•So, $199,600 - $6,200 - $3,200 = $190,200 adjusted sold price.
The question in your mind now is where we got these adjustment numbers. First, remember that we don't want to use remodel or addition costs, as we want to compare like the home had these items either built-in or not at the time the home was constructed. The easiest way for you to get some estimates is to ask an appraiser and/or some real estate agents what they use. It's just an estimate, so don't obsess over it.
Now, we have three comparable homes adjusted to be the same as our subject home, and now we get a sold price per square foot for each.
Comp A: $192,500 / 1790 = $108/square foot
Comp B: $181,200 / 1685 = $108/square foot (coincidence)
Comp C: $190,200 / 1910 = $100/square foot
Now we just average the three to come up with a number to apply to our subject home:
$108 + $108 + $100 = $316
$316 / 3 = $105/square foot
Multiply that by our home size to get the approximate market value:
$105 x 1860 = $195,300 approximate market value
Now you know how it's done, so try it on your own home or an example to get into it. I found a spreadsheet you can download to do the math for you for a 3 comp CMA here. For an example sheet with data, click here to download. Have fun!