IHB: Property Valuation Reports

IHB Property Valuation Reports

Over the first few years of writing for the IHB, I outlined a number of property valuation principals based on the property’s rental cashflow. Pulling together all the financial information about a property into a single report allows buyers to make informed purchases and allows sellers to establish a pricing strategy that will allow them to sell for the best possible price.

The IHB Property Valuation Report is six pages of calculations and notes. It sounds intimidating at first, but once you go through the information it contains, you will not want to buy or sell real estate without this report.

Cover Sheet

The report cover sheet contains summary information; it has some pictures, the address, and a few defining characteristics to identify the property. The first piece of summary data is the asking price, and this is followed by the Comparable Value, the Likely Transaction Price, and the IHB Fundamental Value.

When we prepare a Brokers Opinion of Value, we include what we believe to be the most Likely Transaction Price based on recent comparable sales and the trend of the market. This is our best guess at what the final sales price of this property will be.

The IHB Fundamental Value is based on the rental comps with some subjective adjustment based on a property’s desirability. Since market information is always changing, the report is time sensitive, and it is dated for reference.

IHB Owner-Occupant Brokers Opinion of Value.pdf

IHB Owner-Occupant Brokers Opinion of Value 1

Cost of Ownership and Acquisition

The second page of the report is full of of data and calculations. It looks daunting at first, but it is arranged to provide six (6) data points critical to understanding a property purchase:

  1. Monthly Payment
  2. Monthly Cash Outlays
  3. Monthly Cost of Ownership
  4. Monthly Ownership Gain (loss)
  5. Total Cash Costs
  6. Total Savings Needed

The first three items on the list look superficially similar, but they all provide slightly different information. The monthly payment is the check you will write each month to your lender; pretty basic. We assume conventional 30-year mortgages in our calculations because it is the stable financing of long-term homeowners.

The monthly cash outlays is the total amount of all checks a homeowner will need to write each month to be current on payments, including property taxes, insurance, HOA fees and other expenses. This amount is often much larger than most people realize. Some will try to reduce their monthly cash outlays by deferring property taxes to a lump sum payment every six months, but the expense is still there, and this total can eat up a significant portion of someone’s take-home pay. I recommend using an impound account to pay property taxes to avoid the last-minute scramble.

The monthly cost of ownership is a more accurate accounting of the true cost of owning property. There are many items which add to or subtract from the actual cost of ownership such as (1) income tax savings, (2) equity hidden in the payment, (3) lost income on the downpayment money, and (4) maintenance and replacement reserves.

Once the full cost of ownership is properly calculated, this figure can be compared to the cost of a comparable rental. Any cost savings or ownership premium is reflected here. As mentioned previously, blue chip properties often carry an ownership premium whereas undesirable properties generally demonstrate significant positive cashflow.

The final area of concern is having the cash available to close the deal. The downpayment is an easy expense to identify, but it is not the only cash a buyer will need to obtain the property. Buyers have to budget moving and furnishing expenses, closing costs and interest points (if any) to accurately assess their cash needs. Also, it is not a good idea to spend all your cash on a house and leave no emergency reserves. The spreadsheet estimates 6 months net salary based on the financing qualifications for the loan amount. The total cash costs plus emergency reserves equal the total amount of liquid savings needed to close the transaction.

IHB Owner-Occupant Brokers Opinion of Value 2

Estimates of Value

The third page looks at values and sets the stage for negotiation. It is composed of three sections:

  1. Comparative Sales Value and Negotiating Range
  2. Cashflow Value and IHB Fundamental Value
  3. Asking Price and Value Ranges (chart)

In Negotiating for Real Estate, I outlined the negotiation process and described how the top and bottom of the negotiation range is established. The Comp Range is a measure of the highest and lowest prices of recent comparable sales. The Comparable Sales Value is a blend of the mean and the median of comps used to establish value. By blending the two values, it recognizes outliers without putting too much emphasis on them.

In a stable market, properties may trade at a premium or discount to rental parity based on their desirability as owner-occupied housing. The most desirable “blue chip” properties trade at a 10% premium to rental parity, and transitory rental properties trade as low as 25% below rental parity. When the IHB prepares a Brokers Opinion of Value, we subjectively rate the property based on its owner-occupant desirability, and we adjust the cashflow value of based on our market experience. The resulting value is a theoretical basis for a property’s minimum value in the open market. When prices begin to fall, they generally do not stop until all properties in a market reach their fundamental value.

The chart showing asking prices and value ranges displays all the numbers in an intuitive format and shows the relationships between the numbers. For instance, in the chart below, the negotiating range and the comp range is significantly above a property’s current cashflow value. A buyer wanting to pay cashflow value will not obtain this property as market comps reflect a large ownership premium.


Comparable Sales, Comparable Rentals and concept notes

Page four of the report has the raw data on comparable sales and comparable rentals used to generate the report. This important raw data eliminates much confusion and debate over current valuations. The sections on Comparable Sales Value and Likely Transaction Price and Cashflow Value and IHB Fundamental Value generates the most questions and confusion, so a more detailed explanation of these concepts is included.


Report notes

In an effort to explain many of the concepts and calculations in the report, we have included a line-by-line series of notes detailing any assumptions.



Ignorance is …

George Orwell in 1984 wrote, “Ignorance is Strength” to describe how power is maintained by the few through the ignorance of the many. Those who are responsible for helping people buy and sell homes have preyed on the ignorance of buyers for generations to maintain their strength. They see little reason to change.

Thomas Gray in “Ode on a Distant Prospect of Eton College” wrote the line, “Ignorance is Bliss” to illustrate that ignorance to a problem creates happiness—while the ignorance lasts. This bliss may be welcome at times when the problem is intractable, but ignorance that prevents people from taking appropriate action does not lead to bliss, it leads to pain.

Ignorance is Pain. Ignorance to the housing market can lead to foreclosure and bankruptcy. There is nothing noble or romantic about ignorance to the value of real estate. I have no need to exaggerate the importance of getting this decision right.

I used the tools encapsulated in this report to avoid buying during The Great Housing Bubble. I have shared my methodology with you, and now, the IHB set up to work with you to apply these techniques to your personal situation.

Informed Decisions

I want people to make informed decisions. Based on these reports, some people will wait, some people will look elsewhere, and some people will buy anyway. We do not attempt to persuade; most people are self-motivated when it comes to real estate, and when contemplating such a large purchase, pressure just makes the process stressful.

In time the numbers will say “yes.” I will know when the time is right because my analysis will tell me. Now, the same information is available to you.

Thank you again for allowing us the opportunity to present ourselves to you in this manner. We look forward to working with you.


Larry Roberts

When you are ready to buy or sell a home, we are here to serve you.


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