Basically, the value of a property is defined as the current worth based on the price that a buyer and seller agree upon. It is defined technically as the present value of future benefits derived from ownership of a piece of property.
It is important to note that every buyer is different. This means that what they value as essential elements and features affect the value of a home.
Elements of Value
Government policies/regulations, environment, and social conditions influence different elements of a property’s value. Property value is determined by four elements. These elements are easily remembered by the acronym DUST.
Demand depends on the convergence of the buyer’s interest in the property and their buying power. Generally, when the demand for a property is high, its value also goes up. Some factors that affect demand are demographics, regulations, employment, and wage.
The utility is the ability of the property to satisfy the buyer in terms of best use and fulfilling needs. This looks at what would be the maximum return after a certain time, considering the way it is zoned. One such example is being able to rent it as a vacation home, which is considered one of the best uses of the property. But there may be regulations that limit this type of use in certain areas.
Scarcity relates to the supply of property. When there is a high demand for property and supply is scarce, it is likely to be more expensive.
Transferability refers to the ease with which the property can be transferred to a new owner. For example, having a marketable title for easy transfer and no lines on the property for loan approval.
Property Price vs Property Value
Property price is the payment that a buyer is willing to give and the seller is willing to accept. This is also known as the market value and is often influenced by emotions, preferences, and how competitive the area is. Property price can be subjective but property value is dependent on all the elements mentioned above.
Common thinking is that these two figures will be close. But changes in market conditions can shift how much one is willing to pay and the current value of the property.
Based on the local conditions, property value can rise or fall but assessed values are typically not sensitive to such fluctuations.
How Property Value is Determined
Anyone can do a property valuation whether it be a seller, buyer, real estate consultant, professional appraiser, or surveyor. There are three commonly used methods to evaluate a property and the choice depends on the type of the property, how it will be used, and the availability of information on the property. You can visit janefischer.com to get exciting deals as well as several other listings.
The Income Approach
This approach focuses on the income potential of a property relative to the initial investment. This valuation approach is more commonly used for commercial real estate and rental properties.
This is a very simple way to look at the value of property considering that future income may be more or less valuable five years from now than present day.
The Sales Comparison Approach
The sales comparison approach is the most common one for valuing residential real estate. It is done by comparing similar homes on rent or for sale in a given locality over a given period of time. However, comparable properties must have certain characteristics in common such as square footage, number of rooms and bathrooms, condition and age of the building, etc. It is important for the buyer to engage a certified appraiser or a real estate agent to avoid fraudulent appraisals.
The Cost Approach
This approach views the value of the property as equal to the cost of building a similar property. It is estimated by adding land and construction costs minus physical and functional depreciation. More frequent use of this approach is seen for the valuation of vacant land and properties that are not easily sold (for example schools, hospitals, and government buildings).
Getting an appraisal done can be expensive, especially if you want to do it in advance. However, knowing the value as a seller can help in setting prices that will attract serious buyers and prevent long waits in the market.
Reasons for Knowing the Property Value
Property or homeownership will change with different stages of life. Here are some of the reasons for knowing the property value.
For buyers, a good starting point is to know the market value of a property as it addresses all kinds of concerns that home buyers might have. Also, it is important to know the property value in order to avoid overpaying. A buyer’s agent can determine a property’s approximate value and help come up with a different price to offer to the seller.
Home appraisal tells a seller how much their home is worth (the fair market value) in order to price their home correctly. It ensures they recover all the equity they have acquired as the owner of the property.
The assessed value is a public number contained in property records. So, raising assessed value is good for the seller trying to justify their sale price to a buyer. Likewise, buyers can also use assessed value for lowering the price.
A Mortgage or Loan
If a buyer wishes to buy a house and seeks a mortgage or loan then the lender needs to do a valuation of the property. Property value impacts the ability to take out a line-of-credit, amount of credit, or decisions on refinancing current mortgage using the property as collateral.
Property tax is a percentage of the stated fair market value of the property. The County Assessor decides the value of the real estate and imposes property taxes on it. To decide this value, the assoror looks at what similar properties are selling for, the value of any renovations, any income being made (e.g. from renting a room), and possible replacement costs in an event of an emergency (e.g. fire, flood, or earthquake).
Qualified tax exemptions are also taken into consideration. The derived number is then multiplied by an assessment ratio (a percentage set by the county, generally 80%-90%) to arrive at the taxable value of the property.
The higher the assessed value, the more taxes to pay. More exact tax data can be found with the local tax assessor or by doing a search by state, county, and ZIP code on publicrecords.netronline.com.
There are a number of other taxes (vacant land tax, wealth tax, ground rent tax, municipal tax, property tax, etc.) which are to be paid to the various departments of government. The estimated value of the property is also taken into consideration in calculating these taxes.
Insurance guarantees that it will bear the burden of any large and uncertain loss in the future. Following that reasoning, property insurance protects property owners from damages to or loss of property. This insurance is based on the value of the property. Therefore, knowing the current value (not the sale price) of the property helps to ensure adequate insurance coverage.
Generally, it is expected that renovations increase property value possibilities for income. It can also increase the functionality and aesthetics of a property.
The right project can enhance the property and a significant portion of the expense can be reclaimed by selling to future owners in the form of increased property values. However, that might not always be the case. Spending more or doing a bigger renovation does not always add value to the property. A detailed valuation can break down each area of the property where spending money can be beneficial.
Planning for Retirement or Estate
Property owners need to make smart financial decisions for the golden years. Knowing property values can help in making decisions related to downsizing, transferring, selling, buying properties.
Some of these decisions involve paying taxes or being fair to your inheritors. For example, if an individual decides to transfer his or her property to someone else, they need to know the value in order to determine transfer stamp tax. Knowing the value also helps in planning that all property is fairly distributed upon the owner’s death.
The Bottom Line
This article is an overview of knowing the property value, its benefits, and approaches to calculating it. We recommend doing property valuation at an appropriate time to understand current market trends and make the right decision. A point to remember is that property valuation is a snapshot in time because value changes over time.