Real Estate Basics: How to Assess Property Value

Understanding how to assess property value is a fundamental skill for anyone involved in real estate. Accurate property valuation is essential for making informed decisions, negotiating prices, and maximizing returns on investments. This guide explains the factors and most common methods that are used how to assess property value effectively so that you can make an informed decision on any real estate deal.

What is Property Value?

The monetary value of real estate, commonly referred as property value, is an estimate of a property's financial worth. It's important to understand that the assessed value of property is not static; it fluctuates based on various factors.

In real estate, there exist varied types of values, and each of them serve a specific purpose:

• Market Value: Refers to the estimated price that a property is expected to sell in a competitive market under normal conditions.
• Appraised Value: The value placed on one's property by a professional appraiser. Lenders typically use the appraised value to determine the loan amount for a property.
• Assessed Value: This is a value placed on the property by a government assessor for tax purposes and may not always coincide with the market value.
• Investment Value: This represents the value an investor places on a property based on their specific investment goals and criteria, which can differ from the market value.

Key Factors Influencing Property Value

Several key factors contribute to the value of a property, each playing a significant role in determining its worth:

1. Location

One of the most significant determinants of property valuation is its location. Better locations can fetch higher property prices because of their access to amenities, schools, transport, and places of employment. Inversely, less desirable or remote locations may be less valuable.

2. Property Size and Layout

The size and layout of a property also impact its value. Larger properties with functional layouts and ample living space are typically more valuable than smaller, cramped properties. The number of bedrooms, bathrooms, and other features like garages or outdoor spaces also contribute to the overall value.

3. Condition and Age of the Property

Well-maintained properties with modern updates and features are generally more valuable than older properties in need of repairs or renovations. 

4. Market Conditions and Economic Factors

General conditions of the real estate market and the current economic conditions establish the foundation for property projection. During periods of high demand and low supply, values of property will typically appreciate. Conversely, if the market shifts to be a buyer's market, indicating low demand and excess supply, then the values of the property are likely to depreciate. The main economic factors which typically influence the assessed value of property entail interest rates, employment, and inflation rates.

5. Recent Sales of Comparable Properties (Comparables)

Comparables are the record of recent sales of other properties similar to the one being valued and one of the ways to determine the current market value of the said property. With recent weekly sales data broken down in terms of the purchase of comparable properties in the same neighborhood or area, real estate professionals are able to estimate what the fair market value could be in relation to any given property.

Methods of Assessing Property Value

To determine a property's value, several methods are employed, each with its own approach and purpose. 

Comparative Market Analysis (CMA)

A CMA is a real estate valuation method in which a subject property is compared against others that have recently sold within the same locality, usually known as comparables or "comps." The intent of the CMA is to arrive at an estimate of the fair market value of the property by utilizing the selling prices of comparables.

To conduct a CMA: 

1. Identify the subject property: Gather information about the property being valued, including its size, age, condition, features, and location.
2. Select comparable properties: Find properties sold recently; most possibly within the last 3-6 months which are similar in size, condition, age, amenities, and location.
3. Adjust for differences: For example, one comparable property has one more bedroom than the subject property; therefore, its sale price may require an adjustment downward.
4. Estimate the fair market value: This estimate should be a range rather than a single number, reflecting the inherent uncertainty in property valuation.

Professional Appraisal

A professional appraiser is a licensed and certified expert who estimates value for real estate properties. They play a very important role within real property markets regarding transactions such as buying and selling, refinancing, and matters dealing with taxation. A professional appraisal cost varies and may well depend upon many factors. Among others, the size and complexity of the property in question to location, down to experience.

Automated Valuation Models (AVMs)

AVMs are software systems that analyze real estate values by integrating vast amounts of data in statistical modeling and data analysis. AVMs utilize large volumes of related data, comprising the characteristics of a property, recent sales data, market trends, and other information deemed relevant, to ultimately generate a property valuation with great speed and efficiency.

AVMs typically analyze data from public records, various listing services, and real estate websites. The vendors then use such information to find patterns useful in predicting home values. What models and algorithms the vendors use may vary but generally include techniques such as statistical analysis and machine learning. Prominent AVM providers include CoreLogic, Federal Home Loan Mortgage Corporation, more commonly known as Freddie Mac, and Equifax.

Income Approach for Investment Properties

The income approach is used most for generating-income properties, including rental properties, commercial, and industrial. Essentially, this approach encompasses determining value in accordance with the potential for a property to provide an income stream. In determination of value, an appraiser or investor would often consider both the net operating income (NOI) of the property and a capitalization rate.

NOI represents the annual income a property would generate after subtracting the incurred operating expenses such as taxes, insurance, cost of maintenance, and utilities. The cap rate is an investment-derived predictor of the return an investor would anticipate from a certain investment. It would be calculated by dividing the value of NOI for a property by its market value.

Property Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate)

Cost Approach for New Properties

The cost approach is one of the methods of valuation that is mostly applied to new or relatively new property in cases where the cost of construction is a significant indicator of value. It is also utilized when comparable sales data is scarce or when valuing unique properties with no direct market equivalents.

Cost can be a very useful method to value new or special-use properties. However, just the cost approach alone will often not allow you to reach an informed and lasting opinion on value; frequently, the sales comparison approach must also be used.

Practical Tips for Accurate Property Valuation

Here are some practical tips on how to find assessed value of property:

Research and Gather Data

Make use of online platforms like ZipMatch, Lamudi, or Property24 for current property listings, recent sales data, and market trends. You can also consult with the local government agencies such as the local assessor's office to inquire into the property tax assessments and land values.

Analyze the Local Real Estate Market

Research recent sales data and price trends in the locality to better understand the market conditions. Check out the economic factors, such as the current interest rates, employment data, and inflation, which can affect property values. Also, research the property’s proximity to schools, hospitals, shopping centers, transport hubs, and other amenities.

Inspect the Property

Inspect the condition of the property and identify the repairs and renovations that the property might need. Measure the size of your house and the layout, from the plan view, the number of bedrooms, especially the master bedrooms, and bathrooms.

Consult with Real Estate Professionals

Seek guidance from experienced real estate professionals who have in-depth knowledge of the local market and can provide valuable insights. It is also best to ask a professional appraiser for an independent opinion on the value of the property.

Related Article: Common Mistakes in Real Estate Valuation and How to Avoid Them

The Bottom Line

How to assess property value is one of the most critical skills one can possess in real estate; be they the buyer, seller, or even a savvy investor. Knowing the factors that determine the value of a property, aside from the methods of valuation, will lend you some guiding light in taking decisive measures to succeed in real estate dealings.

Remember, property valuation is not an exact science. A careful analysis of the available data and a thorough understanding of the local market can help you arrive at a reasonable estimate. By following the practical tips outlined in this guide, you can equip yourself with the knowledge and tools necessary to navigate the real estate market with confidence.