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October 12th, 2015 by Eric Lorimore
Ever try typing your address into Zillow.com and wonder how the heck they value your home at $30,000 less than your neighbor’s that is smaller? Or type your address into Trulia.com and find it is $40,000 more than Zillow’s estimate?
The truth is, these sites are at best ballpark estimates and vary greatly depending on the market activity in your area of interest. These sites base their estimates on recently recorded sales from the county. What they do not take into account are things like condition, upgrades, and lot premiums paid for views or location. Within the same city there can also be value differences associated with the quality of schools, proximity to parks, recreation and shopping.
Case in point: I own a rental in Bakersfield, CA where there are 2 high schools. One has a rating of 3, the other 8 out of 10 on the state’s rating system. Guess what the first question prospective tenants ask? “Which high school will this neighborhood attend?”
All cities have good and bad or better and worse neighborhoods. Zillow and other internet valuation sites are zip code driven and include a large variety of neighborhoods. Think of it as a shotgun approach. The danger that we see all too many novice investors make is basing their purchase decision entirely on the often misleading information they gather online.
In order to get a more accurate value estimate, the next step in accuracy is what’s called a CMA or Comparative Market Analysis. This report, usually prepared by a local Realtor, focuses more on the neighborhood and makes allowances for square footage, age, and number of bedrooms and baths. While still not a full appraisal that requires examination of the property inside and out, it is much more accurate.
When you sign a purchase agreement you have what’s known as an “Inspection Period” which is often 10 days but can be negotiated. During the process, a 3rd party appraiser visits and determines the true value of your home, and a 3rd party home inspector visits the property and determines the actual condition. You will also want to order title insurance and talk to a property manager to find out if this is a property that will rent quickly to good paying tenants.
Viewing sales history may give you an indication of market direction, but has no bearing on what the property is worth today. Buying a property, whether for personal or investment use, is not a small purchase. It is critical you know as much as possible about present value and the neighborhood to determine its’ suitability. This isn’t Amazon, you are not buying a neatly packaged little widget. You’re buying a house and the right amount of fact finding needs to take place.
By working with a team of local experts who know the area and know what you’re looking for, it allows you to find the best properties available.
The moral of the story is, internet based valuation systems can’t possibly produce the results of a local team. Buying a home is simply too big of an investment to rely on a computer model for value and quality of neighborhood.
And first-time investors listen carefully: Do not get swayed by price.
Buying the cheapest property on the block does NOT mean it’s the best value or that it will make you the most money in the long-run. In real estate, like anything else, you often get what you pay for.
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