Property Wisdom – Know the difference between cost and value
There’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.