The old dictum in real estate is “location, location, location”, but there’s more to real estate value than location. There’s square footage, bathrooms, quality of fixtures, lead paint, shag carpeting, leaky roofs, and shoddy windows. Even location is an amalgam of different qualities - how close is the house to transit, or schools, or the 7-11? So when you break down the value of a house, break down why the market demands said property, there are a number of potentially quantifiable factors that comprise the total value.

Much like the market value of a public company, there will be objective (book value, cash flow, etc) and subjective factors (animal spirits!) that dictate the worth of real property. The problem at hand is how to quantify, if it is possible, the various factors that comprise the value of a property. The ideal end would be an econometric model for analyzing a neighborhood or neighborhoods (largely because the houses will have enough similarities, e.g. size, location, plot, etc.) and can yield a rough but useful breakdown of the value for each house.

As an example, we might first go through one small neighborhood with relatively similar houses, such as mine. We want to know what amount of the value in each house is due to the square footage, number of baths, etc. Ideally we would compare this neighborhood to a couple of other neighborhoods of similar size in the area to compare other stats too, such as proximity to rail, quality of the school district, crime rate, etc.

Once we have a breakdown of the various value components, we can look at houses for sale or under foreclosure and begin to mine investment opportunities. We should be able to tell what the “maximum” achievable value, within reason, of a house is, given that some renovation is done. Investment decisions can be made intelligently based on how much room for value creation is available and how much investment will be required to realize the additional value in the property.

Of course, this may belong in the ash can with all of my other overly complicated ideas.