What is the biggest mistake when valuing a property?
As a private lender/ hard money lender we internally value every property and I have personally looked at thousands of properties (both residential and commercial). As you can imagine, over the last twenty years I have definitely made some mistakes on valuing a property where I thought the value was X but it was really Y.
I recalled a prior mistake I commonly made when I recently had an appraisal done on my house when I was refinancing with a bank. The appraiser showed up and as I greeted him I see the glassed over look in his eyes. I knew right then that he made the biggest mistake in valuing a property.
With the summer real estate season in full swing how can you ensure you are getting the best deal on a property and valuing it properly? What is the number one mistake in valuing a property? How can you easily make certain you don’t make the same mistake?
When I first began valuing properties almost 20 years ago, I would always look at all my comparables and then look at the subject property. This is the worst approach since how do you know your comparables are actually comparable to the subject property. In valuing real estate this is the number one mistake commonly made by appraisers and investors.
For example, on my house refinance, I could tell by his surprised look when he walked in (the appraiser also had a sheet with him with notes on the comparables) that the appraiser had looked at the comparables before the subject property. When he arrived at my house he was a bit dumbfounded and totally surprised by what he saw. It is a 100% updated hand hewn log home with views of the continental divide. This is not what he was expecting and therefore the comparables were not actually comparable to my house. As a result, his initial value was way off.
To ensure you are comparing apples to apples it is imperative to always look at the subject property first to ensure you know what comparables for the property should be. In many markets that are not uniform (most areas in town) the values can vary substantially even on the same block (maybe they popped the top on the subject and totally updated it as opposed to the house two doors down that still looks like a tear down).
Looking at the subject first is an easy step to take to ensure you are accurately valuing a property. Along with this simple step here are two other important tips to keep in mind:
How accurate is Zillow or other automated tool? Many investors look at online valuation tools (Zillow, trulia, realtor.com) etc… as the authority on value. Unfortunately these sites can be very inaccurate and enable an investor to make some bad decisions. See my prior article: Should you bet your wallet on Zillow or other automated tools?
The final common mistake in valuing properties is the thought that you can quickly “drive by” a property to understand its value. Everyone has access to one tool that is free but not commonly used as much as it should be. What is it? See prior article tool number five: 5 tools for real estate investors
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).