Trish Bongard Godfrey

How to Price A Property

14 May 2013
Trish Bongard Godfrey

I am frequently asked to price a property when it is about to be listed for sale, or sometimes to help owners evaluate their portfolio and assist them in making longer-term retirement plans. When I am asked to give a price, I admit that I am not very happy to come up with "off the top of my head" figures. That might make me seem clever, but it is not sensible. What I can provide is different from an appraisal, which requires a qualified appraiser, and which is often done for other purposes, such as insurance.

However, since I have access to (and keep myself educated about) MLS listed properties in Central Toronto, I feel I can give a pretty good idea of what many property might sell for "in the current market". I have at my disposal the MLS system, Land Registry, and the opportunity to view properties before they sell, so it is reasonable to assume that a hardworking, educated Agent can provide a good "Opinion of Current Market Value" to sellers, and even sometimes to the appraisers. (As recently as this week, I had an appraiser calling me for information about a property a client of mine had purchased last year, to which he wanted to compare another property nearby!)

I have been asked to “price” several properties recently, and for me there is more study and math to it than simple “gut feel”. There are several types of valuations, and not all are applicable to all properties. These are the three main valuations I might employ in my day to day work:

Market Value:  The open market value, defined frequently as the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. This is the most common valuation in my work.

Value-in-use: The present net value of a cash flow that an asset generates for a specific owner under a specific use. This is particular to one user, and would be used to evaluate a rental property, for example. I use formulas to help buyers of investment properties determine what they should pay, and what income they need to carry the costs of purchases and operations.

Investment Value:  This is the value to the owner or prospective owner for individual investment or operational objectives. This applies to many properties, but also for someone who may want to develop a property in the future, such as a buyer assembling several street-front properties for a future condo development.

Approaches to Value

It is important to note that value and price may not be the same.

A property may sell below or above market price for several reasons. Some reasons for this may be lack of market exposure, the rarity of the type of property or its allowable uses, a pre-existing special relationship between the buyer and seller, or if the buyer intends to change the use of a property and believes that the property is worth more if it has a different use in the future.

In simple terms, these are the three ways I use to determine value:

Cost Approach: This approach takes into account the land value plus the depreciated value of any improvements. This method estimates the current land value plus the cost to replace the improvements (buildings, out buildings, landscaping, pools, etc.,) to the condition they are in at the time. This is more reliable for newer properties because the cost and standards of the construction are more easily evaluated – and depreciation is subjective.

For example: How do you value a less-than-brand-new year-old kitchen? Some buyers would live with the kitchen as it is, and therefor will consider it of some monetary value, while other buyers would pay to remove the cabinets and renovate the kitchen and therefore consider the kitchen a liability.

An older property with historic or architectural significance might have some intrinsic value to some buyers, and to others it might be a liability because the use or style of the property could not be changed to their intended use. "The eye of the beholder" really does matter. There may be a lot of demand for a particular price point or property feature, and buyers might pay a bit of a premium for location, amenities, transportation, and other property features not easily replicated, or because there is competition for a property.

Sales Comparison Approach: This is based on the principle of “substitution”. This assumes a reasonable buyer wouldn't pay more to purchase the subject property than they would for a comparable property. This is why, when I value a property, I look at other properties which have sold, were listed and not sold, or are presently on the market, all within a certain period of time, and which are comparable in size, location, condition, etc. to the subject property. Buyers do the same thing when they offer to purchase a home.

Income Approach: This is used to value income-producing commercial or investment properties. In this case we capitalize the income stream and come up with figures for buyers to help them determine if a property will carry itself to their satisfaction, based on the cost of the property and the income it generates.

Working with Clients

The Cost Approach and the Sales Comparison Approach are the methods I mostly use, because I can gather sales data through MLS and Land Registry and costs for structures can be estimated with readily available industry data and experts. I spend lots of time looking at other properties and I have done several major renovations myself – acting as the general contractor and having taken college-level building and construction courses – so I have first-hand knowledge about what is involved and what it costs, although professionally I cannot not claim to be an expert.

I also look at what the seller paid, adjust for improvements and depreciation, and then look at what the inflationary value would be based on the general market trends in that specific area of Toronto. That is also quite useful because the market, in general, is very efficient.

Of course, a property should always be evaluated based on its Highest and Best Use. For example, a tiny, dated home on a large downtown property might be of most interest to a developer, who would therefore pay the most for the land and its potential to develop and improve it, and attribute nothing to the value of the house itself. Zoning changes have made former industrial buildings in downtown Toronto because their new highest and best use became residential.

This is not an exact science, but these are the methods I use to give my seller-clients an educated Opinion of Market Value.

I provide a detailed report to sellers with lots of comparable listings and dates, to assist them in pricing their property to sell for the most amount of money in the quickest period of time.

A dose of common sense, local knowledge, and education helps, too. If you are given this kind of data, I feel it is worthwhile paying attention to it, because many buyers’ agents will also go through the same rigorous process for their buyer-clients on your property. Buyers are not generally inclined to overpay for a property.

If I can assist you in valuating your property, please let me know.