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Property Wisdom – Know the difference between cost and value

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value/costThere’s no failsafe method of assessing the absolute value of a property, but there are practical steps you can take to make sure you pay a fair price, says property expert Laura Henderson.

Property price appraisal is as much an art form as much as it is a science, but that doesn’t mean you can’t have a ready-made ‘formula’ for determining the fair-value price of a property from your perspective and whether that investment is likely to be a profitable one.
The following methods when combined work well:

The comparable approach focuses on factual market data of sales of similar property in a recent time period and gives an estimate of which price is adequate for a certain kind of property. Sales comparisons can be easily done using Internet databases of property transactions. The advantage of this method is that it reflects actual market prices, but, it neglects the aspect of whether a property investment is profitable for the buyer. To get an idea of a realistic price for a property, check prices of comparable sales with local estate agents and Rightmove sold prices.

The income approach concentrates on the profitability of an investment and analyses the present worth of property on the grounds of its anticipated future resale value. In doing so, it gives a good appraisal of whether a certain property is worth its current price to you, the buyer.

Three aspects need to be taken into account with this approach – your capability, the property’s capability and your future plans.

Your individual capabilities reflect the resources you can bring to bear on the property. These include your time, knowledge, money and commitment. The less you have of each, the lower the offer should be.

A property’s capability is all about its income generation potential – this could be through rentals, tax benefit deductions, grants for renovation, as well as the property’s long-term appreciation potential; the ultimate goal being to sell at a higher price per square foot than you originally paid.

Your plans for the property also have a bearing on its value. Does the house come with planning permission to extend, the option of acquiring additional adjoining land or converting outbuildings? Any plans that build a property’s value increases your ability to pay the seller a higher price.

Pre-offer research and financial calculations provide you with the net value of a property. This approach and analysis helps you develop a post-purchase plan. The combination of the two leads you to an offering price. Once you’ve established the net value of a property, you can then determine the intensity of your interest in a purchase and set an offering price that makes sense. It’s not hard to do, but most of us don’t bother.

Bottom Line: A sellers “will-take” price has nothing to do with the true value of a property to you, the buyer. The right money and its potential future value – is what you need to focus on before making an offer.

 

Laura Henderson is a property columnist, author and investment expert. Her latest book Tricks and Mortar: The Little Book of Property Wisdom (£12.99, Book Guild) is out now.

One Response to “Property Wisdom – Know the difference between cost and value”

  1. Tracy Taylor Says:

    Hi, I have been studying the for sale market in Sunderland Tyne and wear for the last five years.
    What I cannot get my head around is the astronomical rise in larger property prices in this area. I realise that the market trend for october is a slight rise, however it would appear that the estate agents in the area seem to jump at the chance to raise prices by a vast percentage more than predicted. Given only half of homes that were for sale last year sold, they appear to be operating a propeganda price war with the sellers and buyers in this area.
    Most people are finding it a difficult situation in the North of England at the moment. Advising people to market their home at a given price for as long as the ressession takes to recover seems to be their tactics. I have often seen homes for sale for over three years, it makes me wonder how many people actually want to sell their homes. Or have they been given false information on the value as so many have remained unsold.
    It still stands that a lot of of our banks in the Uk are still under massive pressure to cut costs and try to pull business together. Not giving out mortages as they had been, not providing credit so easily.
    I understand that the estate agents in the north east have to market their properties, but fail to comprehend where their massive house price increases have serviced their clients wishes to sell the properties. I believe they are not thinking about the true effect that their actions will have on the North east property market, as they outprice local people, there will become a huge social divide. Most locals renting and properties owned by the big investors bleeding the community that has fought so stongly to improve itself over the last 40 years. I also beleive a lot of insider trading exits within the areas property market. It is time the government decided to control the property experts from profiting from their insider knowledge, as with the Banks, once there are no rules to play by, the ships goods are easily tossed around in the hull until eventually it crashes through creating the crisis we have all faced recently.
    We would all like to sell our houses for the same prices as the beckham’s but this is just not realistic. House prices are very close to those that are in the counties surrounding London.
    Is it only me that thinks this way, do the marketeers think that we do not notice that a house price has increased by more than 100%. In a matter of months.
    Having lived in America for some time too I have seen the same happen in areas there. There are less rules surrounding property turn around there, I had thought.
    I just cannot believe the rise in house prices from before the crash to the present day. Some having been priced at 350,000 now priced at 650.000. Thats an icrease of 100.000 a year. I would like to be the ivestors in this area as their profit margins are more that the local Sunderland man could imagine possible.
    Confused and bewildered property studier.
    Can you shed any light on this areas market trends.

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