Am I offering too much or too little for a home that I absolutely adore? I certainly don’t want to overpay, but neither do I want to be outbid by a competitor. Many prospective, well-intentioned home buyers play this unnerving valuation game.
Like magic, some online real estate sites can instantly produce an estimate of a home’s value, but putting too much stock in one electronically produced number — especially when it’ll be your money on the line — is asking a lot. If only there was a more precise way for determining real value. Certainly, a knowledgeable local real estate agent can guide you in reaching a more informed, intelligent choice. Another way is to learn the same concepts that professional real estate appraisers apply every day to determine value. Their home buying tricks – the 10 Principles of Value — will help you view real estate more clearly, broadly and dispassionately. Once you learn to look at property through their professional prism, you’ll become a better buyer, negotiator and decision-maker.
This first principle holds that value can increase or decrease based on expectation of some future positive or negative impact on the property. For example, if you catch wind that your city is a frontrunner for a big defense contract (think Boeing in Seattle), this news could ignite job growth and lift property values. Similarly, Pike Place Market in Seattle was once a derelict downtown waterfront before it was designated for redevelopment. Now it attracts 9 million visitors a year. “The principle of anticipation is like looking into a crystal ball,” said Marty Rodriguez, of Century 21 Marty Rodriguez in Glendora, Calif. “If a home you like is near land designated for commercial use, the owners might build a gas station or shopping center, slashing your property value. So, you better do your homework.”
This principle affirms that when two adjacent pieces of property are joined, the value of the one larger parcel may be greater than the value of the two separately. For example, two lots are valued at $25,000 each, but when combined for one use, they have a value of $60,000. A developer may take this sum-is-greater-than-the-parts approach by purchasing several homes, razing them and combining the vacant parcels to build a new shopping center.
Regardless of how big you build the moat around your castle, few properties are untouched by the evolutionary cycle of growth, stability, decline and rebirth. Because community change is constant, values can change daily. For example,
· Your home is appraised today at $325,000.
· The next day the city announces the construction of a new day/night sports complex bordering your property.
· Appraisal (market value) on the third day is $310,000, owing to the perceived nuisance of lighted fields illuminating your home at night.
This principle holds that similar businesses fare better when they are clustered than if they operate as stand-alones. Many fast food restaurants and auto malls practice this rising-tide-lifts-all-boats principle. These hubs often generate huge tax revenues, which cities use to maintain a high level of service.
This principle says that a property is at its highest value when it fits its surroundings. Therefore, if a three-bedroom, one-bath home is in a neighborhood where all the homes have two bathrooms, you might be wise to consider installing a second bathroom.
“At the same time,” said Mary Pope-Handy, a Los Gatos, Calif.-based Realtor, “too much conformity or an overly tracked neighborhood can result in monotony, which can hurt value. A residential area that provides a variety of styles is preferable to a row of identical houses.”
This is the dollar amount the market assigns your home improvement, not what you actually paid for the upgrade. If you paid $25,000 for a kitchen remodel that added $50,000 to value of your home, you come out ahead. If you paid $75,000 for the remodel, you lose, as explained in the next principle.
7. Diminishing Return
This is the condition where you become home improvement-happy, for example, upgrading your modest kitchen in a middling neighborhood with Viking stoves, hand-forged copper sinks and marble countertops. “You may have built yourself your dream kitchen, but if your extravagance is out of character with your neighborhood, buyers won’t reward your over-indulgence by paying a higher premium,” said Jerry E. Maly, an appraiser in Boca Raton, Fla. “You’d be nuts to make that kind of investment unless you’ve confirmed the market is heading up.”
8. Highest and Best Use
This principle maintains that every property has a single use that produces the greatest income and return. For example, an old office building may not realize its highest and best use if it’s located in a downtown area undergoing a residential renaissance. Its best use might be a conversion to high-end condominium units. In selecting the best value, however, the property use must be: Legally permissible Physically possible Financially feasible Maximally productive “Repurposing a property is not as simple as the ‘Build it, and they will come’ Field of Dreams’ scenario,” said Kurt Barenthin, a Newport, Minn., appraiser. “A potential buyer might have to overcome zoning issues, neighborhood challenges and a host of other legal, physical and financial hurdles.”
9. Progression and Regression
If you live in the smallest house on your block, the value of your home will likely be pulled up. That’s progression. Conversely, if you live in a McMansion surrounded by smaller houses, the lesser homes will likely pull down your value. That’s regression. “What you heard growing up still rings true,” Rodriguez said. “Try to buy the worst house on the best block.”
This principle states that no prudent buyer will pay more for a home than what he or she would pay for another home similar in size, quality and amenities. Buyers still want the most bang for their buck. Knowing the 10 Principles of Value, plus pricing properties online, talking to real estate agents, and physically shopping and surveying your favorite neighborhoods, will clearly sharpen your valuation and home purchasing skills. These activities may not completely relieve your buying anxiety, but you’ll be well aware of the rules of engagement when considering the purchase of your next home.
Peter is a staff writer at MyBankTracker.com who covers banking, personal finance, investing and homeownership.