Monday, November 17, 2008

Property Values - Residential

One of the first questions buyers pose to real estate professional is "what is my property worth". That can be a tricky question to answer. For starters, the agent or broker does not want to give a value that is too high for fear of creating unreasonable expectations which will lead to ultimate failure. On the other side of the coin, they don't want to value the property too low and either insult their potential client or, even worse, adversely affect their commission. In this blog entry, I will deal with the value of residential property.

I would like to say that placing a value on a home is as simple as comparing it to the houses nearby with similar features that have sold recently. In reality, that calculation plays the biggest part in determining the bank's appraisal of the home, but it does not encompass all that goes into placing the asking price or the offering price on a home. Unfortunately for someone like me who likes his assessments to be objective and based on concrete items (incomes, expenses, etc.), there are far more subjective factors influencing homes. Among these factors are perceived affluence of the neighborhood, proximity to schools and the ratings of those schools, crime rates, neighbors, and the list goes on and on.

To start the valuation, you want to use the concrete factors. If it is a new home (e.g. you are a builder), start with the overall cost of construction and add your profit margin. If it is an existing home that the new has worn off of, you need to examine comparable properties and make adjustments based on what your home has or does not have in comparison to those comparable homes. If you are doing this on your own, use the internet to your advantage, but make sure you are getting comparables. A 1500 square foot Cape Cod in Owenton, KY does not equal an identical 1500 square foot Cape Cod in Savannah, GA. You can also use your local PVA's office to your advantage to find out what features comparable homes possess and what type of value the PVA has placed on those homes.

Once you have your concrete numbers in place, you can then start to apply the subjective factors. Look at it through the eyes of a buyer and decide how much each factor either adds to the property or takes away from it. For example: You are 1/2 mile to the best school in the district so you might decide to add $2000; however, your crime rate is double that of any other neighborhood in the same area so you deduct $5000. You can see where I am going with this valuation. You have to decide what each one of the factors brings to the table and how much it affects demand for your property.

The art of valuing homes is not an exact science. It takes a great deal of research and thought. As with all property transactions, I highly suggest employing the services of a real estate professional. Many buyers overlook the benefits of retaining a real estate agent/broker to assist them in finding and purchasing properties. If you are looking to buy, the services of the agent/broker will usually be at no cost to the buyer. If you are the seller, the value of the the experience and insight that your agent/broker brings to the table will, in many cases, far outweigh any costs associated with those services.

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