Ever wondered why you sometimes see a $200,000 property on the same street as a $50,000 property? Or why a gorgeous property can seem to have everything going for it, but it’s worth far less than you thought it would be? I have, and I figured other investors have too, especially those who are new to real estate.
Here’s what I know about this subject: A property’s value is determined by a LOT of different factors. Some of these you would expect, but others may come as more of a surprise. Here are some of the main factors that influence a property’s value – some of which are in your control and some which aren’t.
This one is definitely outside of your control, and it’s a pretty major determining factor for value. There’s a reason that old saying, “location, location, location” exists, and it’s because location really is the #1 driver of value. You could have the world’s most beautiful home, but if it’s in the middle of the inner city, it’s not going to be worth nearly as much as it would if it were located in an affluent suburb. The reverse is true too; even if a property is in poor condition, if it’s in a desirable area, it’s still got a lot of value. Crime rate, schools, and overall cleanliness of the neighborhood also play a role.
Home values are also driven by supply and demand in the local market. This is basic economics. If there’s a large inventory of homes available and not enough demand, the values will be lower. However, if inventory is tight and demand for homes is high, prices will skyrocket. You can see this happening in a lot of growing cities right now, too. Kansas City, where the turnkey market is especially hot, is just one example of a metropolitan area experiencing increased home values due to low supply and increased demand.
Historical Sales Prices
When valuing a home, the historical sales price of the property and surrounding properties is also considered. Let’s say a house has been sold a couple times over the last 10 years. An agent is going to look at those sales prices and how they fluctuated, as well as the price trends for neighboring homes. This will help give them a more accurate picture of a home’s worth, and thus be able to place a fair value on it.
Generally speaking, the bigger the home and the better the condition it’s in, the more it will be worth. A well-maintained home that’s been updated is going to be worth a lot more than an outdated property in poor condition. There’s something to be said for extra bedrooms and bathrooms, as well. These will definitely bump up a property’s price tag, but you do have to consider the demand that exists for different-sized homes. The gold standard for most people is 3-bedroom, 2-bathroom. Anything less than this, and the value will be much lower as these smaller homes are not in high demand in most markets, and therefore cannot command higher asking prices.
Finally, amenities both at the property and nearby also affect the overall value. Having a great outdoor space, fenced-in yard, security system, and “smart” technology can improve value as these are features that buyers are interested in. The same goes for amenities that can be found within close proximity to the property, like parks and restaurants. Another feature that can add a lot of value is how much privacy the property affords the owner. Most people are willing to pay more for a property with mature trees and other elements that add a sense of privacy.
The various factors that influence property value make up a complex formula that changes from market to market. However, the ones listed above are generally factored in no matter where you are. Each plays an important part in determining the overall value of a piece of property, and keeping them in mind as you look for new investments can help you decide if a property is worth it or not.