Estimating House Value
The house value calculation is usually carried out using the most recent sales of comparable houses in the neighborhood or local market of the house that is under consideration.
The house under consideration needs to be compared thoroughly with the comparable houses (comps) that provide the basis for the calculation of its market value. In particular, the disadvantages and advantages of the house under examination vis-a -vis each of the comparables need to be thoroughly understood and recorded. Subsequently, they need to be used as basis for reducing or increasing accordingly the sales price of each comparable in order to arrive to the value that is implied for the house under consideration.
Obviously, if the comparable is better in some of its characteristics, compared to the house under consideration, its sales price needs to adjusted downwards in order to arrive to the value estimate for the house that is being valued. For example, if the comparable has 1.5 baths and the house under consideration has 1 bath, then the sales price of the comparable needs to be reduced to provide an estimate of the price that the house under consideration would sell. By how much should the sales price of the comparable be reduced to reflect the disadvantage of having 0.5 bath less? Here the experience of the active brokers and valuers in the local market is needed in order to apply the appropriate adjustments for such differences. Alternatively, these adjustments can be calculated econometrically using the hedonic pricing model.
Given the above house value calculation methodology, it is natural that with the different adjustments that will be applied to the sales prices of the different comparables we will arrive to several different “values” for the house under consideration, one from each comparable. The house value calculation then can be carried out by taking the simple average of the different values.Alternatively, a weighted average can be calculated, by assigning weights to the estimates derived from the different comparables, if we consider that some comparables should weight more in the calculation because they represent better the house under consideration either in terms of characteristics or location