Finding properties in real estate is one thing, but understanding their value is another. It is an essential part of the process of property transactions and knowing how to value properties plays a crucial role in creating a profitable real estate agency.
Evaluating Property Values In Real Estate
There are a few different factors, some tangible and others intrinsic that affect property prices and it is a real estate agent’s job to know how and why they affect properties.
Compare to Similar Properties
An easy way of getting an estimate for a specific type of property is by checking in on properties similar to the one you are trying to sell. Oftentimes, if you are unacquainted with an area, it can become hard for you to determine what prices certain properties should be coming in at.
However, if you take your time to find similar properties within the same area or region and compare it to the one you are trying to sell, it will make the process a lot easier for you. For example, if a home you are trying to sell has 4 bedrooms and 3 bathrooms, and a swimming pool to go with it, find similar homes in the area and compare it to them – account for some differences such as one less bedroom or no swimming pool.
A very common practice is to take the price per square-foot in the area, and compare it to similar properties that were sold within a reasonable time-frame, give or take a month. \
Use Calculations
Utilizing specific metrics in order to determine the value of a property is common practice. A method of doing this is by calculating the NOI, also known as net operating income. You will need to determine the capitalization rate or cap rate of your property, which is an approximation of the amount you will make back from the property.
The cap rate can be calculated by dividing the NOI with the price you originally paid for the property. The goal is to ultimately have the highest cap rate, meaning there is a larger return on your investment on the property.
It is key to remember that this metric is not the be all and end all of property evaluation. The cap rate calculation should be dependent on different factors that play a role in a property’s value, such as the rents of similar properties. Not to mention, if you acquired a property as it was, the cap rate will not take into account the cost of flipping the property.
Property Location
The value of a property, especially homes, depend heavily on where it is located. A properties location determines the other residents in the area, facilities present or near to the area, recreational activities near the area, necessities near the area and other factors.
If the property is in a high traffic area, it will negatively affect the price, but if it is a property that is in a quiet road that is near the urban areas where anyone can get to the office easily and drop their kids off at school – you can easily note and sell those as plus points adding to the value of a property.
Ultimately, if the property is a desirable location with various factors that will entice people to want to live there, the value will automatically push up, because you are reducing people’s cost and effort in the long-run.
Property Maintenance and Deterioration
Imagine you try to sell an old bicycle for cheap, but you have not cleaned it, greased it or even ridden it for the last 2 years – people will assume you are not trying to sell it, rather that you are trying to get rid of something that is of no use to you and get some monetary benefit from it.
The same goes for a property you are selling, except for the fact that the devaluing is a much higher value. No matter how good the location of the property is or how much you initially paid for it. If you have let it sit there and grow mold all over the walls, while the plumbing has gone out and the walls are crumbling, no amount of leads generated will turn to clients if they do not find similarities between the pictures and the actual property.
Thus, it is important to always check in on the infrastructure, insulation, plumbing, electrical wiring and anything else that can deteriorate over time, in order to ensure you are not selling lies to the prospective owners.
Not only will that ruin your reputation as a real estate agent, but you most likely won’t get any sales and lose multiple leads in the process.
Risk Analysis
Risks in life are common, and the same goes for risks in real estate investments. If anything the market of real estate can be very volatile, and you can expect to have risks that go bad from time to time.
The wisest thing you can do is conduct risk analysis on the properties you have. The best things to analyze are:
- Interest rates
- Local industry health
- Employment rate
- Rental applicant quality
- Government policies that affect real estate
- Laws that affect real estate
These factors can cause a detriment or benefit to real estate in your local area, and conducting a risk analysis on them will allow you to properly understand the risks associated with making investments, and also understand how to value your property at that moment.
Conclusion
Properties are risky investments, but for real estate agents and investors, it is a game that they prepare their whole life to play. However, as there ways of using CRMs for real estate agents to make lead generation easier, there are also ways to better understand the proper valuation of properties on the market, and it is always necessary to take these processes seriously.
