As a professional in real estate with an MBA, and 12 years working in finance, I am shocked by the valuation process most employ in our profession. This valuation process is done mainly by a walk-through of the house and then a mental comparison to other homes on the market and ends with a “gut feeling” that often is affected by the amount of coffee consumed, the mood of the day, and how much the house personally appreciated.

Unfortunately, there is no single appraisal / valuation method we can use to accurately price a home. Rather there are three that taken together give us an approximate value; but more importantly—give home buyers a framework to use in order to calculate their personal fair value for each house.
In the past, most bank appraisers employed the cost approach to appraisal which (simplistically) separates the value of the location and land from that of the house.  I suggest we return to this, as the main difference between buying a home in Modesto and buying a home in Marin is the location, location, location. 

How do we value the location? Ultimately, this is a personal decision. For instance, a person who commutes to San Jose for work won’t value Marin as highly as someone who can take the ferry from Tiburon and walk 100 yards to a 101 California Street office.

Valuation Model #1:  Location Value & Structure value
We have created a more analytical, proprietary approach that has yielded some interesting results. The basic premise is across a large sample size, the structure of homes (not including location) are easy to value—at about replacement cost ($412/sqft 2009, $400/sqft in 2008, $388/sqft in 2007 etc.). If we remove the value of the  structures across a large sample size from a neighborhood or town we are left with the value of the land and the premium past buyers have paid to live in certain neighborhoods. We can then segment this by doing the same calculation for the top half of the market (newer homes with views), from the bottom half of the market. 

Mill Valley Example:

• The average lot in 2006 costs $566,000
• The average high end lot cost $785,000
• The average low end lot cost $410,00

Tiburon Example:

• The average lot in 2006 costs $1,135,000
• The average high end lot cost $1,475,000
• The average low end lot cost $731,000

Once you start with the location value, the house / structure value is fairly easy, and is based mostly on replacement cost which ranges from $375/sqft to $425/sqft. Dated homes with strange floor plans are discounted and homes with extravagant finishes are at a premium.

Model 1 Example: An average Tiburon 2,500sqft home in a decent location with filtered views that has a decent floor plan and has been maintained:

• Lot / location value: $1,135,000
• House / structure value: $965,000
• Fair Value range : $2,050,000 - $2,150,000
• Current list price: $1,850,000
• Relative discount to fair value: 12%

Valuation Model #2:  Appreciation ValueIn this model we estimate original fair value at the cost basis of the current owner. We then overlay average appreciation numbers on top of that original purchase price. If the number is way off (usually on the high side) it is because the current owner over paid for the house when they bought it.
Importantly, the average appreciation numbers are only valid for homes that have been properly cared for as the profits / costs of Home Depot and the electricians, plumbers, landscapers & decorators etc. in our area over the years are real costs associated with average appreciation statistics. If you are looking at a home that has a lot of deferred maintenance, you will need to subtract the cost of doing that maintenance from the appreciation output.

Example Appreciation Value:
The Smiths originally purchased their home in 2001 for 805,500. Overlaying the average appreciation numbers for homes in Mill Valley from 2002 thru 2009, the fair value for their house is now $999,659. If the house needs a new roof, new appliances, new paint and new carpet etc., then the home is worth approximately $60,000 less.

Valuation Model #3: Recent Sales / Market Comparable Sales
This model is very telling in some instances, useless in others, and is the main technique realtors lean on most in explaining valuation to home buyers.

It there are 44 homes on the market in a certain price range priced at $567/sqft, and 10 homes have recently sold at $550/sqft then the going rate for homes in that area is approximately $560/sqft. We then have to look at the range of values that create the average $/sqft and analyze each home individually to try to find a very close ‘comp’ and then zero in on an approximate $/sqft value for the target house.

One of the assumptions of this model is that all homes were marketed and presented equally, and if there is anything I have found in my career in real estate is that most homes are very poorly marketed; that most realtors aren’t savy as to what what their real job is in marketing homes (its not sitting on the sofa on a Sunday afternoon reading the paper).

Last, most realtors will tell you that homes are only worth what someone is willing to pay for them at any one time. This is something I disagree with. I believe that homes in preferential neighborhoods such as those found in Southern Marin have an implied value whether you are able to pull that value out at any one point in time or not.

What all of my research points to is: now is a very good time to buy real estate in Marin County.