Did a Valuation Assessment

Situation:

In June of 2005, we were in the process of moving to Seattle. After looking at several properties, we finally found a really cool loft condo in the historic heart of the city. At $505,000, the price seemed a bit high, based on some other properties we had seen. We wanted to get a better sense of the true value of the home to help guide us in determining our offer price.

What We Did:

Our agent provided us with a list of comparable, recently sold loft condos in the same neighborhood. As we looked through the list, we noticed that the unit immediately next door had sold about 6 months prior for $479,000.

So we used this comp as a starting point. We looked at the size of the unit, the home facts and any changes the owners had made to their home to determine the similarities and differences to the unit we were considering. We determined the following:

• The units were exactly the same in terms of size, layout, location, views and age.
• The comp unit had enclosed the 2nd bedroom, while the owners of the for-sale unit had decided to leave the space completely open.
• The comp unit had central air conditioning, while the for-sale unit did not have any air conditioning.
• The comp unit had 2 garage parking spaces, while the for-sale unit only had 1.

We knew that an enclosed bedroom was more useful than an open space, and that central air conditioning was worth more, too. So we asked a contractor to give us a bid on the cost to close out the second bedroom and to install central air in the for-sale unit. We also obtained the price of an extra parking space from the building manager. Finally, we checked local property appreciation rates, and learned that average home prices had increased 8% during the past 6 months in that neighborhood.

Armed with these facts, we created a spreadsheet to calculate our offer price. Our work looked like this:

Comp unit sale price	$ 479,000
Cost to enclose 2nd bedroom	- $ 10,000
Cost to install central air	- $ 8,000
Cost for additional parking space	- $ 20,000
Subtotal	$441,000
6-month appreciation	+$ 35,000
Value	$476,000

After doing this analysis, we knew the unit was overpriced by almost $30,000! We decided that we did not want to pay more than $480,000 for this home, regardless of how much we loved it. We made an offer of $460,000, figuring we could meet the owners somewhere in the middle.

The owners rejected our offer, as we had expected. What surprised us, though, was that they didn't make a counter-offer. Their inaction indicated they:

1. did not do an accurate job of determining the true value of their home, or
2. were not motivated sellers — perhaps they were just "fishing" to see if they could take advantage of a hot market, or
3. realized we had power in the information we had collected, and that they were not going to be able to take advantage of us, or
4. all of the above

Outcome:

So we moved on. Although we didn't get the cool loft condo, we did find another home that was in a great neighborhood, offered more space, was in better condition, and was fairly priced. The moral? Doing a valuation analysis really helped us approach the buying process in a rational way, and it prevented us from letting our emotions take over. The end result was that we avoided paying too much for an over-priced home.

— Mary M., Seattle

Postscript: As of Nov. 16, 2005, the loft condo is still on the market at a reduced price of $499,950.