Property valuation is a well developed field, though it is more art than science. Real estate property is very organic, surprisingly so to some outsiders for something involving so much money.
It’s A Form Of Prediction
Property valuation amounts to predicting what someone is willing to pay for the property in question. In most cases, there are some fairly solid parameters involved. However, all such predictions are inherently a little bit fuzzy.
You can think of it as being similar to weather prediction. Having clouds suggests rain is possible, but doesn’t guarantee it. Heavy clouds can suggest that if it rains, it will rain a great deal, but you still don’t know exactly where that rain will fall.
This has some things in common with property valuation. Since location matters so much, the city or neighborhood can strongly influence the valuation in general terms. Specific properties will still vary, sometimes by a lot.
The central means by which real estate property value is determined is through comps. This is an industry term that is shorthand for comparable properties. In essence, you go looking for properties that are similar and you find out what they are worth.
If you have enough properties that are very much like the property in question, you can get a pretty solid idea of what the property is worth. The more alike they are, the better.
Ideally, you want a property in the same neighborhood that is as similar as possible in terms of number of bedrooms, number of bathrooms, style of the house and other particulars. Some neighborhoods have many houses that were built around the same time by the same builder reusing a short list of floor plans. In such cases, you may be able to find several houses that are nearly identical.
If you can find at least three properties that are nearly identical and which each has a recent sale price that is very close to the same number, you can pretty confidently value that property at roughly that figure. But this ideal situation is not the norm.
In most cases, you will find homes that are similar, but not identical. This is especially true in older neighborhoods where houses have been altered over the years or in areas with a lot of custom homes where the houses simply didn’t start out with the same floor plans.
In these cases, you will need to find houses that are somewhat similar. Then adjust the price based on the differences. For example, if two houses are nearly identical, but one has a pool and the other does not, you need to figure out roughly how much that pool adds to the value of the house, then adjust accordingly.
You may need to make multiple adjustments for multiple details. Two properties may have started with an identical floor plan, but one may have had many upgrades in terms of materials or even additions to the house. The more information you have about the similarities and differences between two properties, the more power you have to adjust the price accordingly.
Some homes are essentially one of a kind. These can be especially challenging for an appraiser to assess. The industry standard is comparing comparable properties. When nothing else is anything like it, you simply can’t rely upon that standard.
Type Of Market
In hot markets, real estate property value can change rapidly. In very hot markets, the estimated value can go up from one day to the next.
Buyer’s and seller’s markets function differently. In a seller’s market, you can expect multiple offers on a property and bidding wars. In a buyer’s market, you may need to cut the asking price to try to shorten the length of time to sale in order to reduce carrying costs.
This may not seem related to what a property is worth, but it is. Ultimately, a property is worth what someone is willing to pay for it. This is impacted by a great many factors, including the desirability of the area in question, but boils down to willingness to pay.
You don’t have to be a professional appraiser to get a rough idea of how much a property is likely to be worth. These days, you can dig up a fair amount of information about a property via the internet. If you can find a few properties similar to the one in question and find recent data on their sale price, you can start to get a reasonable idea of what the house in question is likely worth.
Commercial properties get a little trickier. They tend to be more unique. The American tradition of building tract housing means that residential real estate frequently offers multiple properties that are strongly comparable.