Eventually, all homeowners seek the answer to the same question: “What is my home worth?”
Whether the purchase of a house is to provide shelter, recurring revenue or rehab to sell, the achievement remains a major investment. The unavoidable concern during ownership will be the financial status of the property as it ages.
What creates value in this type of investment depends on several variables. Three of the factors that affect the worth of real estate are:
- property appreciation
- fair market value
- property maintenance.
Whether the land supports a mansion or an abandoned house, the best benefit in real estate is that it always appreciates in value over time. The appreciation process depends on the current global and local economic climates. Moreover, the consequences of inflation, location, and population growth have a direct impact on property value.
During high inflation, there is a reduction in the purchasing power of the dollar. At the same time, there is an escalation in the cost of goods and services. The rise in interest rates heightens the selling price of homes. Therefore, high inflation causes an increase in property appreciation, especially in prime locations.
Prosperity in real estate corresponds to the future development of the surrounding territory. Value is created by the needs of the population. When the land around a neighborhood is developed to meet the immediate needs of the surrounding population, it gains in popularity. The more popular an area becomes, the more people want to live there.
With over 3 million people born in the United States each year, the demand for housing will continue to grow. People who work in the city want to be close to their jobs. As a result, the population is heavier in the city, the demand for housing is greater and the cost of property is more expensive.
Estimated Fair Market Value
One measurable business strategies that determine product value is to compare competitor’s sales. The housing industry uses this same approach in a comparison study to estimate a fair market value of a property.
There are a few approaches to find the value of a house. An owner can hire an appraiser to do a comparison study. For immediate results, the internet offers do-it-yourself websites such as Zillow.com. Or, if time isn’t an issue, the homeowner can figure out the information by collecting and calculating their own data.
To understand the comparison study, the first thing to understand is most houses, within an area, will have similarities. A comparison study first looks at 3-4 houses similar to the house to be evaluated. The 3-4 houses have to be sold in the past 6 months to get their most recent selling prices. The search for the right homes can expand beyond the immediate neighborhood to nearby communities. The similarities refer to:
- age of the home
- total square footage
- number of bedrooms/bathrooms
- the style or floor plan
The next step is to find the cost per square foot of each house by dividing the price sold by the number of square feet. The answer is the price per square feet or the PPSF. Add the PPSF for each home together and divide the total by the number of models in the comparison. The answer is the average PPSF.
Multiply the average PPSF with the total number of square feet of the home in question. The result is an estimate of the fair market value of the home.
Let’s look at this example:
Lisa wants to find the fair market value of her home. Her 28-year-old
property is a total of 1000 square feet in size. Her house is a single story, split-level dwelling with 2 bedrooms and 1 bathroom.
In nearby neighborhoods, she found 3 similar properties sold in the past 6 months. All properties are the same age, the same total square footage, the same number of bedrooms and bath with the same style/layout.
The houses sold as follows:
- House 1 sold for $200,000 or $200 per square feet
- House 2 sold for $250,000 or $250 per square feet
- House 3 sold for $225,000 or $225 per square feet
Lisa adds the price per square feet and divides the total by 3.
200 + 250 + 225 = 675 ÷ 3 = 225
Lisa calculates the fair market value of her home as $225 per square feet or a total of $225,000.
If Lisa could not find houses with similar features as her house, should have to either add or deduct to adjust for the differences. Let’s say House 1 had a pool in the backyard and this was the only difference between her house and House 1. To get the correct cost per square feet for House 1, she would have to deduct an estimated cost of the pool.
Comparison studies, economy temperament, infrastructure and population growth are drivers that form the value of a property. However, a responsible owner will encourage value through their own initiatives.
The easiest way to bring value to a property is through the efforts of the homeowner. The cheapest approach is simple housekeeping.
A judgment of worth starts at the curb. A consistent routine in maintenance supports a neat and organized appearance. Just as a well-dressed person in a suit represents confidence, an orderly yard and a well-kept facade give the impression of value; even if other issues exist.
Simple duties can include:
- lawn care
- stain removal from drive-way
- clean fixtures
- replace old light bulbs with bright LED bulbs
- sweep up debris, old papers, and dead leaves
- clean gutters, windows and power wash siding
- repair small cracks in siding or chipped paint
- carefully power wash siding and driveways
- make sure outdoor furniture is clean and presentable
A healthy home is a valuable home. But eventually things break and features wear out. A strategy to quickly address concerns will ensure stability and safeness of the structure. Routine checks of utilities will help to prevent breakdowns.
The amount of value an owner can add to a property depends on their finances. An expandable budget can easily produce renovations where the home will be able to compete with newer models. Removal of a wall to open a room, updating kitchens and bathrooms and the install of technological advances allow the property to compete and adds value at the same time.
However, when you really get down to the value of a home, the assessment of worth is satisfied when negotiations end and the selling price is in agreement.