MOST of the VALUE is in the LAND !

[latesummer2008]

Roughly 80% of the Value in real estate here, is in the LAND. So why do we evaluate and price houses by square footage of living space in the HOUSE? Savvy buyers know this, as most of the original houses in Southern California are tired and 50 – 60 years old. I have a new way of Evaluating and Pricing houses by taking this into consideration. The formula is a bit complex, but is not that difficult to use once you get used to it. It is a ratio of the house to the land, multiplied by the Sales Price and coming up with a Housing Factor and a Land Factor. Add those together and you get a Baseline to Evaluate and Price houses.. Not perfect, but a good way to come up with an index for neighborhoods. Obviously some adjustments have to made made for other variables. Uneven lot, traffic, view, building materials, etc.

http://westsideremeltdown.blogspot.com

[masayako]

I don’t think judging by the land size should be the major factor of the formula. Basically, each house and each location is unique, one can only use sound judgement to determine the price one is willing to pay for any RE.

For example, a small piece of land in Del Mar oceanfront compare to a big lot in RSF (no view), which one should have a lower/higher HPM? Who cares? To each person, the actual value is different, it’s based on one’s interest.

Masayako

[latesummer2008]

VALUE and PRICING differ. A home Value, depends on what it means to any one buyer. However, Pricing, should be based on historical trends and at what price, will initiate the most amount of buyers, in a certain time period, achieving the optimum price.

http://westsideremeltdown.blogspot.com

[latesummer2008]

HPM formula is as follows:

1) Divide Living Space/Lot to get HF(House Factor)
2) Subtract HF from 100% to get LF(Lot Factor)
3) Divide Sales Price/Living Space to get $/sq ft (House)
4) Divide sales Price/Lot size to get $/sq ft (Lot)
5) Multiply $/sq ft(House) x HF(House Factor) = HV(House Value)
6) Multiply $/sq ft(Lot) x LF(LotFactor) = LV(Lot Value)
7) Add HV(House Value) + LV(Lot Value) = HPM(House Price Multiplier)

Also, this will give you an idea how much the House and Lot is worth individually. The HPM (House Price Multiplier) is to be used as a baseline or index for original houses on standardized lots. Sales Price will take care of the Location Factor, but you may have to adjust slightly for building materials, view, traffic, uneven lot, etc.

Since most of the value is in the land here, what do you think?

http://westsideremeltdown.blogspot.com

[sdrealtor]

I think you have too much time on your hands and are wasting alot of time trying to quantify something that is impossible to quantify in the manor your attempting to do so.

Supply and Demand. Thats all……..

[latesummer2008]

sdrealtor, correct, but, demand is LOW and SUPPLY is high. As a buyer, wouldn’t you want to know the going price of the LAND and the HOUSE ? Here in S.Calif most of the value is in the land, not a crappy 50-60 year old house. And most figures thrown around the real estate industry are $/sq ft of the HOUSE. If you can figure out HOW MUCH per sq/ft HOUSES are selling for AND HOW MUCH per sq/ft LAND is selling for, then you can add them together to get a GOOD idea of how a property is (PRICED) at a given time. NOT, how much a person may pay (Value). In a declining market such as this, it is best to know HOW WELL property is PRICED. OF course supply and demand is what drives the market, but it doesn’t inform a buyer to how much a house is worth in an arms-length transaction. I applied this formula to two houses on Pier Avenue in Santa Monica, same block, lot, living space and realized one sale that closed within 3 weeks of another was OVERPRICED by just under $100,000. They’re more than screwed now.

Perhaps you should actually try the formula, before you judge it.

http://westsideremeltdown.blogspot.com

[Bugs]

Different units of comparison are used in the market for different property types. Some property types are valued based on the price/SqFt of lot area; some are valued based on price/SqFt of building area; some are valued based on rent multipliers or occupancy ratios; some are valued on the bumber of rooms or the number of units.

Single Family Residences are valued using the sales price itself as the unit of comparison, with refinements for the various differences. There are several reasons for this, not the least of which it is the method used by buyers and sellers in the market. It’s not the only way to do it, but it has proven to be the most accurate and reliable method.

It’s been my experience that the people who rely on price/SqFt/building area for houses are mostly clueless. It’s an almost worthless unit of comparison for houses, except in markets where the data is so similar that there are no differences to account for. Of course, when that happens, the range of sale prices is so narrow that it’s easier just to look at them as a group and rank the subject property within that range.

By the way, you have your value vs. price definitions backwards. Price is what you pay; value is what you get. Once stated, price is a fact, whereas value is an opinion or estimate.

[PerryChase]

“It’s been my experience that the people who rely on price/SqFt/building area for houses are mostly clueless.”
——
Bugs, again I agree with you.

I’ve been looking at older neighborhoods of San Diego. I have a very simple, quick way of looking at house value. I figure that I were my own contractor, I could build my own house on land that is already entitled for $80-$100/sf. If I raze a house and rebuilt (or completely renovated it), the value should still be in within the neighborhood range, albeit on the upper end. If do doing so results in an outlier then the house for sale is too expensive.

[latesummer2008]

Price vs. Value. Price is what is paid at a certain time. Value is how much something is worth to a certain person. Value can differ to different people, whereas price is indeed a fact, and captures a certain moment in the history of a property. That is why HPM (House Price Multiplier) analyzes Sales Price for a given SFR. Evaluating SFRs by $/sq ft of living space is inaccurate. Most of the value HERE, is in the LAND. Otherwise, we would have prices like Kansas. The HOUSES in Kansas, are generally better constructed, than here.
I’ll take a big lot and small house any day, over a big house on a small lot in the same area. Often times, bigger houses are one persons’ dream and the next owners’ nightmare, as resale is not usually considered, when doing an addition.

http://westsideremeltdown.blogspot.com

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