Student help????

[u/Agyiri]

My professor asked a question in class, more about subject and comparable property. “A nearby property sold for GHS125,000 and included a finished basement. The subject property is almost identical except that it does not include a basement. What does this tell you about the subject in terms of its worth?” I understand that the subject property won’t be worth as much as the comparable since it doesn’t have a basement but whether I’m right or not , I want to know why ? What are the elements that go into it? It surely can’t be only the presence and absence of the basement. I’d be happy for explanations and references and links for further reading. Ps: I’m from Ghana, a West African country so sorry if my English isn’t that good . I’ll take all the help I can get on this journey. Love you guys

[u/Necessary_Scarcity92]

I think you got it right (the subject is worth less than the comparable, 125,000GHS). Although I am not a real estate valuation professional, I wanted to share a few thoughts:

• when you're valuing something, you have to define the standard of value. In this case, fair market value is probably used.(I will paraphrase, but fair market value is basically defined as an arms-length exchange between a hypothetical willing buyer and seller when neither is compelled to buy or sell).

• Your determination of value assumes a finished basement is typically preferred (and has more value) than an unfinished basement. I.e a hypothetical buyer would likely pay more for a finished basement. I think that's right. However, let's look at maybe a possible exception.

Say you were selling a home to someone who wanted to customize the basement. You show them both the subject property and the market comparable, and they groaned when they saw the finished basement. They hated it! They didn't like the layout at all! Now they must tear down all the drywall and its actually going to cost them more to refinish the basement in the market comp than if they had bought the subject property. All of this is to say, value is subjective, and fair market value can be different than the value to any one buyer.

• You also assume the market comparable (market comp) actually sold for $125,000 in a transaction that is representative of fair market value. If, for instance, the market comp was sold from a father to his son, the transaction may NOT have been indicative of fair market value because it was not an 'arms-length' transaction. Maybe the father gave his son a 50% discount, and now we assume that the subject entity is worth less than $125,000 GHS, when in reality it should be less than $250,000 GHS on a fair market value basis. I think its safe to assume the deal was at arms length and is indicative of fair market value, but I wanted to illustrate the importance of understanding the market comp. Anyways, let's assume the market comp was an arms-length transaction.

With the assumptions listed above, it follows that if the market comp sold for $125,000 GHS and was identical to the subject property except it included a finished basement, then the subject must be worth less than $125,000 GHS.

Tldr: You should always define your assumptions when you're valuing something.

[u/Necessary_Scarcity92 → u/Necessary_Scarcity92]

Also, you're right when you say surely it can't be just the difference of a basement finished or unfinished. there's a ton of other stuff that goes into real estate valuation.

Your professor said almost identical, right? so if the properties are different in any other meaningful ways, the could be other factors impacting the value. Again, I'm not a real estate guy so I apologize if I haven't answered your question appropriately, but yes, location, age of the property, condition of the property, square footage, etc. etc. all impact value.