How Do I Determine My Property’s Value?
Property values are a cornerstone of the real estate business, yet even experienced real estate investors seem to focus on the functionality and style of their proposed purchases, expecting these characteristics to lead to increased property value. That’s not always the case, though. At its core – even though there are other factors at play – property value boils down to location. It’s important to keep that in mind when trying to find the property that will be a great investment.
The reality is that while physical structure depreciates over time, the land underneath the structure is what appreciates in value. After all, land is the one thing that no one is making any more of these days. This is a significant distinction, and why location matters. For example, a run-down property in a good location can be a great investment while a terrific property in an area with low home values may establish an effective price ceiling when it comes to what a seller can ask for the home.
To be perfectly honest, the only way you’re going to know for sure what your property is worth is to have it appraised. There are two things you can keep in mind to get an overall idea, though.
Location – it matters.
As we say often in real estate, it’s all about location, location, location. It’s ridiculously important to bear this in mind. Like we said earlier, you need to take into account what’s going on in the area. The first thing you should do is taking a look at (closed!) sales of three comparable homes in the area. The key word here is comparable. You need to make sure that the homes you’re using for comparison are actually similar to the one you own or want to buy.
For example, the home next door sold for $250,000 and has a new roof, a swimming pool, and a remodeled kitchen, it doesn’t follow that your home will fetch the same price absent these things, even if the two are of similar square footage and design and sit on equally sized plots of land.
Remember to check things like issuance of commercial building permits, recent tax assessments, school performance and development plans, and infrastructure improvement initiatives. All could indicate, over the long term, that property values in the area may increase.
Don’t forget to account for the property’s condition.
New appliances, roofing, and landscaping all have an effect on how much a property is worth. So do amenities like decks and swimming pools. You can add these features, to be sure, but as an investor you’re a little more likely to be taking on things such as foundations, structure, plumbing, and remodeling.
Kitchens and bathrooms are the most likely candidates for remodeling, and a new roof, if it’s necessary, can vastly improve the value of the home (conversely, leaving on an old or damaged roof will depreciate the value significantly). AC units, in particular, are of prime importance as well.
Beyond that, everything needs to be up to code and in good condition to even consider comparisons to adjacent or similar properties. Wiring, convenience with lighting, and plumbing should all be accounted for. Flooring is also a good idea, especially if the home has old carpet. And if you leave that 70’s wallpaper in the kitchen, do so at your own risk.
How do these two factors influence each other?
In a nutshell, the location will establish a ceiling for what you can feasibly ask for your property. This is important to keep in mind because if homes don’t sell above a certain price in a given area, then investing in expensive additions to the property may not be a wise move.
The degree of depreciation or physical obsolescence will be specific to each property, but it’s fair to say that if left alone, a property will continue to lose value until it no longer adds value to the land. It might even reduce the value of the land. Some land parcels with inferior structures, as compared to the surrounding properties, might actually be worth more if left unimproved.
Long-term projections of the area’s value in general are worth taking into account. If the area is about to see a large influx of commercial development, then that could be a positive sign. If there’s a lot of market activity in terms of homes being bought and sold, that could drive up prices in the short term and also indicate a trend of migration for the future that could keep prices high.
Rent prices in the area are also worth looking into, because a high price-to-rent ratio means the area is unfriendly to buyers but commands high home values for sellers. It could be a double-edged sword, depending on which side of the equation you’re on. As rent prices decrease, more buyers can enter the local market. If they remain high, they indicate high property values. Whether or not either is advantageous to you as an investor depends on whether you’re intending to flip or rent your property.
As a final note, be sure to measure the pros and cons of each area and property within the context of your own plan as an investor. What works for one investor may not work for another.
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