Sunday, April 15, 2007

(HPM) House Price Multiplier, A new method, to evaluate and price HOUSES, on the WESTSIDE of LOS ANGELES.

With most original houses being 50-60 years old here on the Westside , it is no secret, that most of the value is the LAND. Unfortunately, most houses are evaluated entirely by square footage of the HOUSE. Condos are easily evaluated this way because, there is no land and the units are often similar. I propose a new formula, that analyzes the value of the LAND and the HOUSE, for standard sized lots, with original houses. This value is to be used as an INDEX, for neighborhoods, streets, and even blocks. Obviously, there are other variables, that may have to be adjusted for. However, this is to be used as a BASELINE, to get an idea of how HOUSES and LAND may be priced. The formula is a little extensive, but, rather easy, once you get used to it. Here it is:


To find (HPM) House Price Multiplier for an area you do the following:

1) Divide the HOUSE square footage by the LAND square footage to get the (HF) House Factor
2) Subtract the (HF) House Factor from 100% and you get the (LF) Land Factor

Ex. 1000 sq ft HOUSE located on 5000 sq ft LOT

1000/5000 = .20 (HF) House Factor
1.00 - .20 = .80 (LF) Land Factor

3) Take the most recent SALES PRICE of a house and multiply it by the (HF) House Factor to get the (HV) House Value
4) Take the (HV) House Value and divide it by its square footage to get the (HV/SQFT) House Value per Square Foot

Ex. 1000 sq ft HOUSE located on 5000 sq ft LOT, sold for $1,000,000

$1,000,000 x .20 (HF) House Factor = $200,000 (HV) House Value
$200,000 / 1000 = $200.0 (HV/SQFT) House Value per Square Foot

5) Take the most recent SALES PRICE of a house and multiply it by the LF (Land Factor) to get the LV (Land Value)
6) Take the LV (Land Value) and divide it by its square footage to get the LV/SQFT

Ex. 1000 sq ft HOUSE located on 5000 sq ft LOT, sold for $1,000,000

$1,000,000 x .80 (LF) Land Factor = $800,000 (LV) Land Value
$800,000 / 5000 = $160.0 (LV/SQFT) Land Value per Square Foot

7 Add the (HV/SQFT) House Value per Square Foot to the (LV/SQFT) Land Value per Square Foot to get the (HPM) House Price Multiplier


Ex.

200.0 (HV/SQFT) + 160.0 (LV/SQFT) = 360.0 (HPM)

Now, you have a method to price other SFRs, in the same area, as long as you have the LAND SQUARE FOOTAGE and the HOUSE SQUARE FOOTAGE. You can apply this formula to HOUSES on the Westside of LA, where most of the value is in the LAND. The SALES PRICE will take care of premiums paid in different locations. However, this is to be used as an INDEX and BASELINE to value and price original houses on standardized lots. Remember, you may need to adjust for an uneven lot, building materials, traffic, or views, etc.

I will begin, by posting some of the calculations that I have from recently closed sales. My hope is, people will begin doing these types of evaluations, in their own neighborhoods, and post them in the Specific Areas, located to the right, in the Archives Section of this Blog. Right now, I have the following Specific Areas listed in the Archives:

1) Brentwood
2) Santa Monica
3) Pacific Palisades
4) Mar Vista
5) Beverlywood,
6) Culver City
7) West Hollywood
8) Marina del Rey
9) Venice
10) Westwood
11) Rancho Park/WLA
12) Malibu
13) Bel Air
14) Century City
15) Beverly Hills

What's your opinion on this new tool, for pricing (SFRs) Single Family Residences ??

19 comments:

latesummer2008 said...
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latesummer2008 said...
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latesummer2008 said...
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latesummer2008 said...
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latesummer2008 said...

I have posted the first real examples of (HPM) House Price Multiplier for 2 houses located in Beverlywood. It is the very next thread, below this one. Click on the comments section in the "Beverlywood Meltdowns" Specific Area and you will see how it works.

Now you have a better way to appraise (SFRs) Single Family Residences in this DECLINING MARKET.

Craig said...

I love the enthusiasm and attention to detail but I think this is just way too complex and will bog you down. I think the best thing to do is watch recent listings, sales and historical sales in a specific area and get a baseline feel for what the land is worth and then feel out how much different types of construction add to that value.

mgb43015 said...

DQ News for March shows Pac Pal average price per sq ft for SFR at $780.00, close to the lowest figure over the past 18 months of $773. My realtor friends say it is active and the number of deals bears this out but it is the low priced homes that appear to be moving. some deals have been made between 2 and 3 million but almost everything over that seems to be sitting and sitting and sitting. That said, it also appears a home just went to escrow with an asking price over 12 million but it has been listed for over a year if my memory is correct. I am with you. wait this out.

latesummer2008 said...

Pacific Palisades was affected last time the market went south in 1989 also. Places that have shown the greatest appreciation, will be hit the hardest, in my opinion. I will be posting (HPMs)House Price Multipliers in this blog, for closed sales of this specific area in the "Pacific Palisades Meltdowns" section of the March Archives. I would bet, they are dropping and will continue to do so.

Be patient, and you will be rewarded.

latesummer2008 said...

MELTDOWNS are just starting to appear now. HUMONGOUS MELTDOWN in PACIFIC PALISADES of over 55% using the HPM method. Another MAJOR MELTDOWN in Rancho Park of over 40% using HPM. Look in the March Archive section, then scroll down. Also, CONDOS are starting to CRUMBLE.

Dr Housing Bubble said...

latesummer2008,

Not bad. However you forget that we live in Southern California and you have to factor in peyote induced prices. Economics, which you are using, have literally no impact on prices in the current atmosphere. Will this change? Yes. But the major question is when will this be.

For example, I've given countless examples over at Real Homes of Genius and you can see that in terms of replacement value, investment return, or any other financial instrument of measuring prices are out of sync with anything economic. Thus the definition of a bubble is appropriate.

The credit spigots are being turned off and little by little the drought will permeate throughout the nation and the Southland.

Doctor Housing Bubble
www.doctorhousingbubble

Craig said...

I posted this on the other westside blog but here is a meltdown I found:

We know someone who recently bought a condo in the Highlands...and I was looking at comps on zillow and I stumbled upon the following sale info:

Sale History
04/18/2007: $725,000
12/15/2006: $725,000
12/08/2005: $875,000

TAKE A LOOK AT THAT LOSS!! (and also see how lucky that knife catcher was to get out at 725)

The address is: 17245 Palisades Cir, Pacific Palisades, CA 90272

latesummer2008 said...

Condos are especially starting to get WHACKED... Even in the higher-end areas. I would be concerned about foreclosures and declining HOA fees, special assesments etc. Could turn out to be money pits. Not to mention, overbuilding in many areas. My guess is many will become rentals.

Great Meltdown in the Palisades! If you find any others, post them in their specific area in the "older posts" from the months of March and April.

Take a look at Pacific Palisades. I have posted a few major meltdowns there.

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