Every real estate investor desires a high return on investment from their property investment. You can blame this on real estate proving to be one of the best investments available. Unfortunately, the hope of high returns on investment is often dashed because investors don’t know the factors that influence property value.
Your property value is a cumulative of several factors. However, before examining these factors, you will be learning about property value and the types of property value that exist.
What is Property Value?
Several investors often mistake the term “value” for terms like “cost” and “price”. However, these concepts are different from one another. Even though the cost and price could influence the value of a property, they are not the same as the value. By implication, the value of a real estate property could be lower or higher than the cost.
The value of a property can be defined as the current worth of future benefits an investor will gain from ownership of the property. As a result, the valuation of a property should factor in governmental regulations and environmental conditions. The valuation should also consider economic and social trends that could influence the elements of value.
There are four elements of value:
- Demand: Demand is the desire backed up by the ability of a person or group of individuals to satisfy the desire.
- Utility: Utility is the ability of a property to satisfy the desires and needs of its future owners.
- Scarcity: In simple terms, scarcity refers to the finite availability/supply of properties.
- Transfer-ability: Transfer-ability refers to the ease with which ownership rights can be bequeathed to another person or group of individuals.
Types of Property Value
- Fair Market Value: A fair market value is the price at which a willing seller will sell a property to a willing buyer. The condition for a property to have a fair market value is that neither the seller nor the buyer is under compulsion to sell nor buy the property. Additionally, both parties must have all the facts and relevant information about the property being transacted.
- Liquidation Value: The liquidation value is a property value that is dependent on the reason for its liquidation. An orderly liquidation could occur if there is a span of a few months before the property needs to be sold. However, if the property needs to be sold immediately, forced liquidation will occur.
- Marketable Cash Value: The marketable cash value of a property is the amount remitted to the seller after the deduction of all costs associated with the sale of the property. Examples of associated costs could include commissions, photography, advertisement and other miscellaneous activities carried out to aid the sale of the property.
- Replacement Value: This is a term that is more frequent in insurance. It refers to the cost of recreating a building with the same specifications at the market value as at the date of valuation of the prototype building. In some cases, the replacement value can be called Reproduction Value or Reinstatement Value.
- Salvage Value: The salvage value is a type of market value obtained by reducing a property to its components and selling these parts individually.
- Scrap Value: It is a type of salvage value in which the component parts have no personal value aside from the value of the materials from which they were made.
- Fancy Value: This occurs when a buyer needs to acquire a property by all means. Consequently, he may need to pay way higher than the market value of the property in question. The extra sum, the buyer is willing to pay for the property is known as the fancy value.
- Depreciation Value: This is the reduction in value of a property as a result of age, deterioration, wear and tear and a reduction in general outlook and desirability.
- Assessed Value: This is the value placed on a property by municipals for taxation purposes. Sometimes, this value is based on the “Use value” of the property, rather than the market value.
- Use Value: The use value of a property is determined based on the purposes the owner uses the property. For example, the use value of the property on which a park stands could cost more than the market value of a plot of land in the area. However, in some cases, the Market value and the Use value could be equal if there is a resale market for the features in the property.
Factors Affecting Property Value
Several factors could affect property value. These factors include:
1. Economic Factors
Economic factors play a crucial role in the sale and purchase of properties. A booming economy signifies more earning and buying and capacity. As a result, people are likely to be more interested in acquiring new properties and constructing buildings.
On the flip side, in a down economy, more people will be struggling to make ends meet and survive. As a result, the demand for properties will drop and so will the value.
2. Location of the Property
Location plays a crucial role in the value of a property. Properties located in the city, in central locations and near social amenities cost more than properties in the suburbs. Additionally, the accessibility of a property could influence its value positively. By implication, the more accessible a property, the higher the value.
3. Political Factors
Political factors are important in determining the value of a property. The political factor in any community affects the ease of doing business, investments and economic certainty. The more politically stable an economy is the better its economic landscape. This will in itself propel more investors to gravitate towards the economy and shoot up the property value.
On the other hand, investors will avoid locations of war, uncertainty and economic instability. This will in turn lead to decreased demand and low property value.
4. Supply and Demand
Demand and supply a major determinants of the value of a property. Economically speaking, the way to combat surging demands is by increasing the supply. Unfortunately, land is in finite supply. Hence you cannot produce more of it when the demand surges.
The only way to increase the "supply" of land to beat surging demand is by increasing the price. In situations where there are large units of the property, these are usually split into smaller units as well.
5. Renovation Potential
Real estate investors and property buyers are fascinated by the ability to personalize their own space. Such buyers will prefer a property that can be adjusted to suit their taste rather than a property that has to be left unchanged. Due to this, the demand for properties that can be renovated is often higher than the demand for properties that can’t be adjusted easily
6. Diversification Potential
A property that can be used for several purposes costs more than a property with a streamlined purpose. For example, land whose major mass is a pond/rock might not sell as fast as bare land. You could blame this on the restriction placed on these lands by the pond/rock. While it is not impossible to build on the rocks/pond, it will cost more to erect buildings on such structures. This could be a major turn-off for potential buyers.
7. Population and Demographics
The population is directly proportional to an increase in property value. The higher the population of people in an area, the greater the demand for such properties. Consequently, this will lead to an increase in property value. As a smart real estate investor, it might be wise to start with properties that don't yet have a large population. Once such properties have a high growth potential, acquire them and keep them till the demand gets intense.
8. Age and Condition
This applies mostly to buildings and erected properties. As constructed properties increase in age, their value tends to drop. The drop in value could sometimes be fast-tracked by wear and tear, poor maintenance and abandonment.
Despite the limitation on a property by age, you can benefit maximally from the property. One such way is renovating the property before putting it up for lease or sale. As a real estate investor, you should know how to leverage forced appreciation in real estate.
Conclusion
Property value is not a one-size-fits-all. When different people see a property, different things run through their minds. These could influence their view of the property and the value they place on it. Consequently, when a property is evaluated, you just might come across several discrepancies in valuation prices.
Property values don't just increase and decrease. There are several factors responsible for the value of a property. In this blog, we examined the types of property values. We also analyzed the factors that affect property value.
If you are new in real estate and would love to start investing right away, you don’t have to repeat common mistakes first time investors make. At Land Republic, we desire to take you through the real estate investment process while shielding you from avoidable stress and fraudsters. For starters, you can visit our blog which has several resources for your real estate journey. For more enquiries and guidance in acquiring real estate properties, contact us at +2348122222283 and support@landrepublic.co.
