Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

What Are The Biggest Factors In Determining Property Value?

Written by JD Esajian

When evaluating a new property, one of the first things you need to do is determine its approximate value. In today’s market, that may be easier said than done. With the increased number of foreclosures and short sales, two properties can often give completely different values. Failing to determine an accurate property value will impact the rest of the process. While estimating property value is often an inexact science, there are indicators that will help paint a clear picture. By recognizing what they are and what they mean, you will be able to come up with an accurate value. Here are some of the most important factors that will help you determine a property’s value:

1. Location: There is a reason that they say location is the most important quality in real estate: it is true, regardless of the property type. The location the property is in is the first and foremost item you should recognize. A 5,000 square foot home in the middle of Manhattan holds a different value than if the property was in Arkansas. The reason for this is based on the supply and demand for the specific area. Even within the same town, a few blocks can completely change everything.

The best comparables are the ones closest to the subject property. The further out you go, the less accurate it becomes. A similar property that is ten miles away really isn’t a comparable sale. You want to look at what has sold or is on the market ideally within one mile of your property. This is what buyers will look at when they buy, and what you should be looking at as well. The more specific you are as to the proximity of your property, the more accurate the value will be.

2. Square Feet: The size of the property is the next most important factor to look at. When comparing square footage, it is important to know what you are looking at. Some properties will either add or omit the square footage in the basement to their calculations. Ideally, you would like to be within 20 percent of the subject property to give you an accurate number. Extra square footage alone does not equal value. Your property may be bigger, but that doesn’t mean it is more valuable. Even if it is more valuable, it may not as valuable as you think. A few extra hundred square feet is usually not enough to move the price too drastically. This is especially the case if the space is rendered useless. If you are on the fence as to the exact size of a property, look at the MLS listings in addition to the tax records. Property owners have to pay taxes on any additions. The town will give you a good idea of the exact size of the property. Extra square footage is important, but bigger isn’t always better.

3. Room Count: There is a greater emphasis placed on the number of bedrooms and bathrooms than the size of the house. A smaller home with an extra bedroom will probably have more value than a larger home without the bedroom. There can be a huge difference between two, three and four bedroom homes in your market. You should never blindly look at a listing and assign value. There are many instances where a bedroom will be added that is so small it shouldn’t even be recognized as such. On the listing sheet, the dimensions of each room are noted. Look at this information and see where it applies to your property. Bedroom count is important, but you also need to look at the overall room count. Dining rooms, living rooms, kitchens and bathrooms all hold certain value. Out of these, the bathroom count is the most important. Buyers will often look for a bedroom and bathroom count when stating their search. Even an extra half bathroom can make a big difference in the price.

4. Amenities/Miscellaneous Factors: Assigning value to pools, decks, garages, driveways and appliances is an inexact science. The most important thing to look at is whether or not they are common for the market. A pool may appear to add value, but if it takes up the entire back yard it may have an adverse impact. Look at what has sold in your market and what items are common to each sale. If every property has had a two car garage and your property does not, you need to reduce your projected value. You can make it up in other areas, but it is not a guarantee. All new appliances will increase your value, but not as much as you may think. It is also important to find the condition of other properties when they sold. Short sales, foreclosures and bank-owned properties are typically sold as is, and need at least some work. This will decrease their value.

There is also a certain amount of common sense that should be used. Over improving a property in a lesser market will not increase the value. Homes in better areas in worse conditions are typically more valuable than a home in pristine shape, but in a rough neighborhood. It is important to think about value from a buyer’s perspective.

Value is based on supply and demand. Start with the location of the property and go from there. Always use hard data to give you the best possible estimate on value. There is enough information available if you know how to use it.