Determining the Value of your Property

Most people in real estate have a hard time determining what property is actually worth.  It can be a challenging task if you do not know what you are doing.  Looking at Zillow to tell you how much your home is worth is not going to cut it.  Professionals do not get paid the big bucks to check Zillow.  They use a few creative methods to help establish a properties market value or After Repair Value (if you’re going to fix stuff), which is the likely sales price the property would for if offered in an open and competitive real estate market.

What does everyone in the world say is the single most important factor in establishing value?  Location, Location, and Location.  I am sure that everyone has heard that before and it is absolutely correct.  In Billings Montana a 3 bed 2 bath house, on the West End might sell for $180,000 to $200,000 while the same house on the south side would sell for $100,000 to $120,000.   When you think about it, they are only a few miles away.

What else determines the value of property?

There are four characteristics of value.  They are Demand, Utility, Scarcity, and Transferability.   When talking about demand I feel it’s easy to understand when there are lots of people wanted to buy houses prices are going up. When there are not a lot of buyers prices go down.   Now what the heck is Utility?  Utility is the ability of the property to meet the desires of the person or persons buying the property.  Scarcity is another key factor in determining value.  The reason beach houses in California cost so much is because there is only a limited amount of beach land. This raises the price.  The same has to do with the rims in Billings Montana.  There are only so many houses you can put under the rims or on top of the rims.  And the forth characteristic of value is transferability.  This simple means can the property be sold in a timely manner.  Sometimes titles of property can have liens on them that make it a hassle to sell.

Three Approaches to Appraising the property.

The first approach is the Comparison sales method or the market data approach.  This method is based on the cost of purchasing a property of equal desirability and utility or the cost that others are paying for similar properties.

This approach is fairly simple.  All you do is take properties that are similar in size, location, and structure and compare them.  I usually take about five comparable properties and compare them.  Then I go drive around a look at each one.  This way I can throw out any that just do not fit. If your comparable property is superior to your property then you need to adjust accordingly. For example if your subject has a one car garage but your comparable has a two car garage you might need to take $5,000 or so off your comparable price. Have lunch with an appraiser and he can explain how all this works. Comparable sales method is what most real estate investors use to determine price.  It’s what I feel gives you the most accurate price that you can sell the property for.

The cost approach method is most effective when there are few comparables, for example, libraries, school, and new rapidly selling neighborhoods.  The cost approach is based on depreciating current construction costs to arrive at a value.  You take the land’s value, plus the construction costs of a new building subtract accrued depreciation of the improvements and get your value.   This can be a good approach if you are buying a brand new house, where there are not a lot of sales yet because a subdivision is very new.

The last approach is the income approach or capitalization method.  This method recognizes that the value of a property is related to the amount of net income the property can produce.  It is used to value multifamily property and commercial property.  The income approach converts net operating income into a value by dividing the NOI by a capitalization rate that investors expect to earn on investments in an area.  Ask appraisers for the cap rate in your area.

These are all ways to figure out value.  They can get complicated so I recommend having a professional appraiser explain each one to you.  For real estate investing most use the Comparable sales method, which is the most accurate and true to what the market is doing.    Contact Big Sky Property Solutions for more information on determining the value of your house CLICK HERE

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