One of the challenges of real estate investing is determining the value of the property. It is not an exact art or science, but rather a combination of both art and science.
On one side, if you value the property too high, you will not have room for profit because no one would pay higher for the property. On the other side, if you value it too low, your offer would come in much lower and would probably not get accepted. Determining the value of the property is a critical skill for every investor.
Property appraisals are normally what many people refer to as the definitive statement of what the property is worth. The truth is, that is just not the case. Let us give you an example as to why…
Imagine that you had a diamond ring, and you took it to a jeweler to get it appraised. It is a beautiful ring and the jeweler says that he has never seen one like it. He places a value of $10,000 as the appraised value of the ring.
You begin thinking to yourself, “Wow! $10,000! I could sell it and use that money to buy a lot of things I have always wanted to buy.” In a moment of excitement, you say to the jeweler, “Great! I will sell it to you for $10,000.” The jeweler then says, “I am not going to buy it from you for $10,000. I simply said that is what is worth. I would pay you $6,000 for it if I were going to buy it.”
This is exactly what happens to the values of real estate appraisers. The appraiser does their best to place a value on the property. Even though they do as much research as possible and apply some “science” to their opinion, the appraisal is nothing more than an opinion of value. If you were to ask the appraiser to buy the property at that price, they would probably laugh and decline to do so.
In real estate, you are dealing with a market system. A market system means that values are constantly in a state of flux (like the stock “market”). While people may place an opinion of value on something, the bottom line truth is that a property is only worth what someone else is willing to pay for it.
This is why your best gauge of property values is determined by comparable properties that have sold recently. Appraisers also look at this information to come up with their property value. However, the same principle applies here. As an investor, since you intend to make a profit on the property, you are not going to offer the value of the appraisal. You are going to pay less for it so that there is room for you to profit.
In order to improve your accuracy in your deals, you must improve your ability to accurately determine property values. You want to compare properties that have sold (as recently as possible) that are as similar in location, age, size, and style as possible. That is the science part of determining property values.
The “art” side of property values deals with factors that cannot be measured by numbers. Is the property in a desirable location? Is the home functional for a family to live there? Is it close to shopping, employment, and other locations? Does the home’s exterior (curb appeal) draw people in? All of these factors also determine how valuable a property is.
The key is to remember that, at the end of the day, a property is only worth what a buyer is willing to pay for it. It has nothing to do with what the property was appraised for. The better you are at determining property values, the more confidence you will have in approaching each transaction.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.